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1
Capital Account Safeguard Measures
in the ASEAN Context
February 22, 2019
2
Glossary
AEs Advanced Economies
AFC Asian Financial Crisis
ASEAN Association of Southeast Asian Nations
BOJ Bank of Japan
BOT Bank of Thailand
BNIBs Bank Negara Interbank Bills
BNM Bank Negara Malaysia
BSP Bangko Sentral ng Pilipinas
CET Common Equity Tier
CFMs Capital Flow Management Measures
CMIM Chiang Mai Initiative Multilateralisation
DI Direct Investment
ECB European Central Bank
EDYRF Exporters’ Dollar and Yen Rediscounting Facility
EMEs Emerging Market Economies
FDI Foreign Direct Investment
FEA Foreign Exchange Administration
FMC Financial Market Committee
FPIs Foreign Portfolio Investments
FX Foreign Exchange
GFC Global Financial Crisis
IFIs International Financial Institutions
IMF International Monetary Fund
LEI Legal Entity Identifier
LTV Loan-to-Value
MPMs Macroprudential Measures
NDF Non-Deliverable Forward
OF Overseas Filipino
OI Other Investment
3
PI Portfolio Investment
RENTAS Real-time Electronic Transfer of Funds and Securities System
RREPI Residential Real Estate Price Index
SBI Bank Indonesia Certificate
SDA Special Deposit Account
UFR Use of Fund Resources
URR Unremunerated Reserve Requirement
4
I. Introduction
Many emerging market economies (EMEs) are undergoing capital account liberalisation,
recognising that freer capital flows can provide greater economic opportunities. Nevertheless,
policymakers need to be mindful of the risks that large-scale capital flows can pose on
macroeconomic and financial stability and the appropriate policy responses.
In the current global environment, EMEs, which are highly integrated with the global
economy, have been exposed to a series of external financial shocks as a result of policy decisions
by advanced economies, in particular by a more common use of unconventional monetary policies
in advanced economies since the global financial crisis (GFC). Such policies as well as their recent
unwinding have led to extraordinary capital flow movements among EMEs, with significant
impact on exchange rate volatilities and domestic financial conditions. This is because the buildup
of inflows in earlier periods could lead to large and sudden outflows of capital. Sharp capital flow
reversals can be homogenous across several EMEs due to herding behaviour by foreign investors
and thus could result in destructive impact. Hence, managing capital flows, including the adoption
of appropriate safeguard measures must be incorporated into the policy mix to maintain
macroeconomic and financial stability. Policymakers need to carefully identify the triggers, nature
and duration of the crisis or imminent crisis in order to appropriately calibrate their policy tools,
while also accounting for country specific challenges.
In managing unprecedented volumes and volatility of capital flows, EMEs require robust
policy toolkits beyond traditional domestic macroeconomic policies. Given country specificities
and idiosyncrasies, a “one-size-fits-all” prescription or treatment may not be suitable. When policy
space is available, countries may adjust monetary and fiscal policies as well as resort to exchange
rate flexibility and foreign exchange reserve management to manage capital flows. Nevertheless,
when these conventional tools are not sufficiently effective, more targeted measures such as
macroprudential measures (MPMs) and capital flow management measures (CFMs) may be
deployed as the complementary measure.
Over the past decade, there is a rising interest to use MPMs to safeguard financial stability
when inflows are fueling excessive credit growth domestically. In EMEs, MPMs have been widely
used since 1990s. Of late, studies have shown that countries have had successful experiences in
managing capital flows using macroprudential policies (IMF, 2017b). Empirical studies have also
found that MPMs are effective in mitigating certain components of systemic risk (BIS-IMF-FSB
report, 2016).
5
Meanwhile, CFMs have been argued to be a more appropriate instrument compared to
conventional tools (broad monetary and fiscal measures), given that they are targeted and have less
unintended consequences on the domestic economy. Korinek (2011) and Qureshi et al. (2011)
suggest that prudential management of capital flows to EMEs may be desirable from a welfare
perspective, as they reduce the incidence and severity of financial crises. An IMF study (2018) also
casts doubt on the traditional business cycle view and shows that all types of recessions including
those arising from external shocks and small domestic macroeconomic policy mistakes could lead
to permanent losses in output and welfare.1 The literature advises policymakers to internalise and
coordinate the actions of market participants toward a lower level of financial fragility by imposing
measures that discourage excessively risky financial instruments, in particular short-term dollar
denominated debts. Mitigating these externalities would increase both stability and efficiency in
the EMEs and would make all stakeholders better off.
Based on the experience of ASEAN, views and guidance of International Financial
Institutions2 (IFIs) on managing capital flows remain rather rigid and only applicable when
countries surpass a certain development threshold in their financial system infrastructure. Such
guidelines or models at times do not adequately capture country-specific issues and do not
sufficiently take into account prevailing macroeconomic circumstances. In addition, the existing
IMF frameworks on capital flow management tend to be more directed at recipients rather than
source countries, with only a handful of studies and policy papers that call for a more coordinated
approach to regulate these flows by both source and recipient countries (Ghosh et al., 2014; and IMF,
2012). This is despite the significant spillover impact monetary policies in the advanced economies
has had on emerging economies in the last decade. The impact on capital flow surges and reversals
stems from both conventional monetary policies and unconventional tools such as quantitative
easing programs. Empirical findings by Ghosh et al. (2014) also suggest that there may be scope
for greater international cooperation on both ends as well as among recipient countries in managing
large and volatile cross-border flows. As observed time and again that a country’s decision on
monetary policy could have a spillover impact on capital flows volatility into another jurisdiction,
example being the episode of “taper tantrum” in mid-2013. IFIs should play a role in assisting
countries in managing capital flows through the various channels in which they interact with their
members (ECB, 2016).
Given these ongoing issues in managing capital flows, this paper aims to present the
different approaches and safeguards in dealing with capital flows by ASEAN countries in Section II.
1 The Economic Scars of Crises and Recessions, IMF Blog, 2018.
2 Classification of measures and appropriate use, recommendation on the sequence of measures to be used to manage
capital flows. (See Section III and Appendix 1)
6
This paper will also present implications from IFIs’ frameworks and ASEAN’s perspectives
towards guidance on capital flow management, drawing from the ASEAN experiences in Section III
and ASEAN’s collective proposal towards IFIs’ framework going forward will be discussed in
Section IV.
7
II. Experiences of ASEAN countries
1) Capital flows in ASEAN
This section examines recent trends in capital flows in ASEAN, and outlines the recent
policy measures implemented to mitigate the negative impact of capital flows.
ASEAN has experienced increasing two-way capital flows over the past two decades,
as shown in Figures 1-3 below. Foreign Direct Investment (FDI) inflows to the region increased
over five-fold, from around USD 21 billion in 2000 to USD 109 billion in 2016. Despite a slight
pause in 2008-2009 during the GFC, net FDI inflows have since resumed. However, portfolio
inflows and other investment inflows were more volatile.
FDI, portfolio investment (PI) and other investment (OI) outflows from ASEAN have also
increased since 2000. This was partly due to ASEAN’s efforts to liberalise their capital accounts
and allow residents to invest abroad more freely. ASEAN investors, however, divested their
portfolio investment in 2008 and their other investment in 2009 following the GFC. Meanwhile,
FDI outflows remained positive throughout, reflecting its long-term nature and being far less
sensitive to shocks. The capital flows movement also resulted in exchange rate fluctuations and, to
varying degrees, asset price movements in the region.
Figure 1: ASEAN’s capital inflows and outflows
-150
-50
50
150
250
350
Outflows (Billion USD)FDI Outflows PI Outflow OI Outflow
-100
0
100
200
300
400
Inflows (Billion USD)FDI Inflows PI Inflow OI Inflow
Source: CEIC database and BOT staff calculations
8
Figure 2: Selected regional currency movements against the US dollar
Figure 3: Stock indices of selected ASEAN countries
With more pronounced volatile capital flows in the last decades threatening
macroeconomic stability, this calls for appropriate policy responses for ASEAN countries.
Based on a survey conducted by the ASEAN Working Committee on Capital Account Liberalisation
(WC-CAL), member countries have implemented various safeguard measures to preserve
macroeconomic stability against the backdrop of significant global capital flow volatility during
2006-2015. Most countries employed a wide array of measures, including CFMs and MPMs, to
0
0.5
1
1.5
2
2.5
Source: Bloomberg
IDR MYR PHP THB SGD
Depreciation
Index (Jan 2000=1)
Taper
tantrum
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
0
500
1000
1500
2000
2500
3000
3500
4000
Source: Bloomberg
SG MYS TH IDN (LHS) PH (LHS)
Taper
tantrum
GFC
GFC EU debt
crisis
EU debt
crisis
9
address their country-specific challenges and circumstances. Details of measures of selected
countries are provided in the next section.
10
2) Experiences of selected ASEAN countries
To deal with volatile capital flows over the last decade, many ASEAN countries have
implemented measures to safeguard their economic stability. This section highlights the
respective country experiences on capital flows, policies implemented including CFMs and
MPMs, as well as their effectiveness, hoping to shed some light on how to appropriately and timely
mitigate the adverse impact of large capital flows.
2.1) Indonesia’s experience
Capital flow situation
In the period after 2008, capital flows to Indonesia fluctuated significantly. Flows were
highest in 2014 when net capital inflows were more than USD 40 billion. This was due to domestic
economic stability and continued accommodative monetary policies in advanced economies.
Figures 4 and 5 show that capital inflows to Indonesia rebounded in 2012, after a temporary drop
in 2011, which coincided with the beginning of a current account deficit in recent years. This
upsurge of capital flows was followed by a strong fall in 2013, when capital reversal hit most
emerging countries, including Indonesia, due to “taper tantrum”. Capital reversals reoccurred in
2015, as investors felt jittery over rising uncertainties in the global financial market due to
increasing expectation of fed funds rate hikes, concern over Greece’s fiscal negotiations and
unanticipated Chinese renminbi devaluation.
Figure 4: Indonesia’s Balance of Payment Figure 5: Indonesia’s Capital Flows by Type
This high fluctuation of capital flows in Indonesia was due to the fact that a large part
of the flows was in the form of portfolio investments, which were mostly short-term and
invested in relatively liquid financial assets to gain higher returns. Naturally, portfolio
investments are risky as shifts among types of portfolio assets and between countries could happen
in a frequent and instant manner. Portfolio investments are also highly sensitive to market
sentiments, particularly negative ones.
-15
-10
-5
0
5
10
15
20
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1*
Q2*
2010 2011 2012 2013 2014 2015 2016 2017
USD billions DI, net PI, net OI, net
* forecast
11
On that remark, volatile portfolio flows had contributed to turbulences in Indonesian
financial markets, which challenged policy responses to curb negative repercussions on the
overall economy. It demonstrates evidence to the common knowledge that volatile capital flows
could complicate monetary management as they could lead to exchange rate misalignment from
economic fundamentals. The exchange rates’ function as a shock absorber could therefore diminish
and might even turn into a shock amplifier. The exchange rate that was misaligned from its
fundamentals may also mislead economic agents in giving appropriate responses.
On the other hand, FDI inflows to Indonesia were much less volatile and posted positive
trend on the back of relatively good domestic economic prospect from relatively strong domestic
demand, long-term macroeconomic stability and continued structural reforms.
In addition, one must also not overlook OI flows which include foreign debts and deposits
that tend to fluctuate as well. Nevertheless, their movements had much less influence over asset
prices and exchange rates given that payment (outflows) and withdrawal (inflows) of foreign debts
have been scheduled in accordance to loan agreements and thus could be anticipated in advance.
Implemented policies and their effectiveness
Volatile capital flows and its corresponding challenges, together with the need to maintain
the resilience of external sector, prompted Bank Indonesia to pursue a policy mix aimed to (1)
change the structure of capital flows to reduce its volatility and its impact on the economy by
preventing certain types of portfolio investment while also encouraging more long-term capital
flows such as FDIs; and (2) improve statistics to monitor capital flows (balance of payments).
Various efforts were implemented through a series of policies since the GFC, including
CFMs and MPMs, to strengthen economic and financial system stability that would in turn
contribute to more sustained capital inflows. Policies pursued by Indonesia since the GFC were as
follows:
a) Policy to encourage FDIs:
Reforms to improve business climate in Indonesia were implemented in order to attract
more FDIs.
b) Policy to maintain macroeconomic stability:
Greater exchange rate flexibility was adopted so that the rupiah exchange rate could better
adjust in order to correct any misalignment from the underlying economic fundamentals.
Adequate foreign exchange reserves were maintained as cushion against possible capital
reversal. The accumulation of foreign exchange reserves was a byproduct of monetary
policy and was not aimed at meeting a certain target level.
12
Foreign exchange (FX) market intervention was used to smoothen exchange rate
volatility, and was not aimed at attaining a certain level of exchange rate.
Current account deficit was guarded at levels that were sustainable and in line with
economic fundamentals.
Financial market deepening was accelerated in order to enhance its function as a shock
absorber, reducing price volatility in the financial market.
The use of onshore banks for withdrawal of export and foreign debt proceeds was made
mandatory.
Bank Indonesia Certificate (SBI) minimum holding period was implemented since 2010
to minimise adverse impact from short-term capital inflows on monetary and financial
system stability, as well as to promote other transactions in the money market and to improve
effectiveness in monetary management. (Last adjusted in 2015)
Foreign currency reserve requirement was adjusted in 2011 not only to serve as a
monetary instrument to control money supply but also to safeguard banks’ foreign currency
liquidity. (Last adjusted in 2018)
Regulation on bank’s Net Open Position (NOP) was first implemented in 1989 and aimed
to mitigate banks’ FX risk exposure due to a range of possible changes in external
conditions. Since 2003, changes were made to the NOP policy to shift it from a micro
perspective to a more macro-based objectives, which includes financial deepening and
financial system stability. More specifically, adjustment of the NOP limit in 2010 was aimed
at strengthening monetary and financial stability as well as supporting medium and long
term growth through financial deepening, which includes deepening of the FX domestic
market. The latest adjustment to the NOP limit was in 2015 and aimed at further improving
bank’s flexibility in managing their FX exposures whilst still maintaining prudential
principles, and supporting financial deepening by introducing more depth in the domestic
FX market.
Regulation on bank’s short-term debt was adjusted to minimize exposure to FX risks. In
particular, the ceiling on bank’s short-term debt was set to a maximum of 30% of capital,
and approval from Bank Indonesia was required for long-term debt. This regulation was
further relaxed in 2013, particularly in terms of the types of short-term debt to be included
in fulfilling the requirement.
Rules governing foreign exchange transactions were implemented as part of the financial
deepening effort to help stabilise domestic financial markets. In particular, foreign exchange
transactions against the rupiah above certain threshold were to be supported by underlying
transactions in order to prevent speculative activities.
13
Corporate External Debt Regulation was implemented in 2014 to strengthen the
resilience of corporations that have foreign debt through the adoption of prudential
principles. This regulation, consisting of hedging, liquidity and credit rating requirements,
aimed to enhance corporate risk management practices of non-banks which will ultimately
lead to rupiah economic stability in general. (Last adjusted in 2016)
c) Macroprudential measures to mitigate procyclical behavior and systemic crisis
Loan-to-Value (LTV) ratio and Down Payments (DP) on motor vehicle loans was first
implemented in 2012 and has been adjusted several times (last adjusted in 2018). This policy
aimed to safeguard financial stability by mitigating the buildup of macrofinancial risks in
the housing and motor vehicle sectors. LTV functions as a countercyclical tool to moderate
mortgage loan creation and influence demand.
Secondary Reserve Requirement was first introduced in 2009 and later adjusted in 2013
to further enhance banks’ resilience to liquidity risk on the back of rising inflationary
pressure, current account deficit and other external pressure which could adversely impact
market liquidity and disrupt stability of the financial sector. In 2018, the secondary reserve
requirement was replaced by the macroprudential liquidity buffer (MPLB), i.e. a
countercyclical tool used to counter banks’ liquidity procyclical behavior that aimed to
manage speculation or excessive risk-taking due to oversupply of liquidity as well as to
provide better liquidity flexibility to banks in times of stress (i.e. it can be used for repo to
Bank Indonesia). The MPLB level was adjusted based on the credit cycle, complementary
to the Countercyclical Capital Buffer (CCB).
Loan to Deposit Ratio-based Reserve Requirement (LDR-based RR) was first introduced
in 2010 to strengthen the resilience of banking sector and optimize banks’ intermediary
function amidst heightened pressure in the economy triggered by rising inflation. In 2015,
the LDR was changed into the Loan to Funding Ratio (LFR) based RR, to support financial
deepening by accommodating a broader based funding through the inclusion of securities
issued by banks, as well as to support financial inclusion initiatives. Further refinements to
the LFR-based RR (newly named Macroprudential Intermediation Ratio) were made in 2018
and applied to conventional and sharia banks, in which securities purchased by banks were
also allowed to be acknowledged as banks’ intermediation.
Countercyclical Capital Buffer (CCB) was implemented in 2016 at 0% and has been
evaluated every 6 months. The CCB functions as a countercyclical tool to mitigate the build-
up of systemic risk from excessive credit growth. It has remained 0% since its implemention.
14
d) Improvement of statistics to monitor capital flows:
Refinement of BOP statistics.
Introduction and Improvement of Banks Daily Report, which includes data on FX
transactions in the spot, forward, swap, and options markets, which can be utilised to
monitor FX supply and demand, including those of non–residents (capital flows).
These policies have shown effectiveness in their aims to ensure macroeconomic and
financial stability. In the 2010 to mid-2013 period, for instance, the implementation of SBI
minimum holding period was quite effective in dampening the volatility in the SBI market,
including lowering foreign capital inflows placed in SBI. In another direction, the subsequent
lowering of the minimum holding period in 2013 after the “taper tantrum” and capital reversal also
helped to stabilise capital flows in Indonesia.
Other measures such as the requirement imposed in 2014 for corporations to hedge their
incoming FX debt repayment, together with countercyclical macroprudential tools have also
contributed to greater macroeconomic and financial stability. The FX debt hedging requirement
led to quite significant increase of the forward transactions which in turn helped improve the
structure as well as the deepening of domestic FX market. As a result, it contributed to lower
volatility of the rupiah exchange rate. Likewise, the LTV ratio has also played a role in returning
stability as evidenced by a slight slowdown of the growth of mortgage loans.
It is important to note that while the aforementioned policies were primarily aimed to
promote stability and sustainability of the Indonesian economy, these have in turn helped foster
investors’ confidence. This is evidenced by the fact that FDI inflows to the economy returned since
the fourth quarter of 2013 after a rather sharp reversal earlier in the year as overall macroeconomic
and financial stability was kept intact.
Further explanation of key policy actions taken by Indonesia in recent years as well as their
rationales and impacts are outlined in Appendix 2 Table 1.
2.2) Philippines’ experience
Similar to other EMEs, capital surges are not new to the Philippines. From 2005 to present,
the Philippines has experienced episodes of capital surges. The responses to them were adopted
depending on the prevailing circumstances and nature/factors prompting the surges.
A. Capital flow situation during the pre-GFC
The Philippines posted net capital outflows during the post-Asian Financial Crisis (AFC)
from 2005 to 2006. In 2007, surges in capital inflows arising from foreign direct investments
(FDIs), peaked at USD 2.92 billion. While there had been a decline in foreign portfolio investments
15
(FPIs) in the same year due to increased investor risk aversion, FPIs still posted inflows of USD
1.72 billion.
For the period 2005-2007, effects of capital surges were reflected in continued upward
pressures on the peso-US dollar exchange rates and expansion in domestic liquidity. The peso
appreciated against the US dollar from 1.73% in 2005 at PHP 55.09 to 11.19% in 2007 at
PHP 46.15, with volatility ranging from 0.84% to 2.10%. The appreciation of the peso against the
US dollar was largely due to the strong influx of foreign exchange (FX) from Overseas Filipino
(OF) remittances, FPIs and FDIs.
Implemented policies and their effectiveness
The BSP implemented reforms to increase the resilience of the domestic financial system
to the volatility of capital flows and to enable it to efficiently allocate capital flows in productive
activities. The BSP also implemented the monitoring and transparency of capital flows of the
banking sector. Alongside with the said reforms, the BSP continued its measures in reducing the
supply of FX inflows and increasing the demand for FX in response to rising portfolio inflows.
Policy rates adjustment. The BSP raised its key policy interest rates three times by a
cumulative of 75 basis points in 2005.
Exchange rate flexibility. The BSP continued to adhere to a market-determined exchange rate
and allowed FX flexibility while guarding against speculative flows that could contribute to
volatilities and undermine the inflation target.
Reserve accumulation. This allowed to counter capital flow reversals when these threatened
to bring negative impact on the value of the domestic currency.
Prepayments of foreign borrowings. Amidst large FX inflows, the BSP accelerated the
servicing of some of its outstanding debt obligations. The BSP also encouraged the National
Government and the private sector to take advantage of strong external liquidity position to
prepay their foreign debts.
Liquidity management. The BSP implemented measures to help prevent inflationary
pressures in the face of sustained FX inflows. This allowed special deposit account (SDA)
placements of banks to be considered as alternative compliance with the liquidity floor
requirements for government deposits. SDA facility is a monetary policy instrument deployed
by the BSP for the purpose of managing excess domestic liquidity in the financial system and
not intended for investment activities funded from non-resident sources.
Macroprudential management. Various tools were introduced to limit banks’ ability to fuel
credit booms and engage in excessive leverage, such as limits to real estate loans exposure,
16
provisions for loan losses, requirements on banks’ capital adequacy and regulations on
derivatives activities
FX reforms. The BSP reviewed and adopted policies aimed at making the regulatory
environment more responsive to the needs of an expanding and more dynamic economy that
has become increasingly integrated with global markets. The reforms adopted were intended
to: (a) promote diversification of portfolio investments; (b) give banks greater flexibility in
managing their FX exposure; and (c) facilitate non-trade current account transactions and
outward investments of Philippine residents.
Capital market deepening. The BSP supported initiatives related to the development of
domestic and regional bond markets, particularly the creation of a wider array of financial
products that would stir market activity and enhance greater market depth, breadth and liquidity.
The Philippines sustained its growth momentum amidst continued uncertainties in the
global front due to its strong macroeconomic fundamentals. This is shown by the benign inflation
environment, strong external position, improved fiscal condition and a resilient banking system.3
The BSP’s adoption of several measures helped prevent excessive volatility in the FX
market. These measures were also deemed effective in ensuring ample domestic liquidity and thus,
allowed the BSP to contain possible inflationary pressures.
The measures also facilitated FX outflows for legitimate requirements and at the same time,
addressed the influx of capital into the country.
B. Capital flows situation during 2008-2012
Amidst the challenges posed by the stresses in the global economy and the global economic
downturn, the Philippines experienced volatilities in capital flows.
In 2008, the Philippines posted a net capital outflow of USD 1.37 billion, a significant
turnaround relative to a net inflow of USD 169.94 million in the previous year. This massive
outflow was primarily attributed to substantial FPI outflows of around USD 1.59 billion, a major
reversal from FPI inflows of USD 1.58 billion in 2007.
From 2009-2012, emerging markets in Asia, including the Philippines, experienced large
capital inflows ranging from USD 0.90 billion to USD 11.49 billion, with the latter as the highest
net inflow posted in 2010. This was mainly on account of extra accommodative monetary policy
adopted in advanced economies, large interest rate differentials between advanced economies and
emerging markets, and the US subprime crisis which prompted institutional investors to purchase
financial assets including bonds and equities in emerging markets. Other factors such as the
3 BSP Report on Economic and Financial Development, 2007
17
country’s macroeconomic conditions and authorities’ fiscal and monetary policy management,
upgrades on Philippine credit rating, and brighter growth prospects contributed to sustained net
inflows in the aforementioned period.4
The Philippine peso, likewise, showed resilience, buoyed by strong dollar inflows from OF
remittances and export earnings, solid business process outsourcing revenues and tourist receipts.
In addition, the weakening of the US dollar against most currencies due to the more
accommodative policy stance in the US economy and the protracted growth exhibited by advanced
economies, provided support to the peso.
Implemented policies and their effectiveness
To manage the effects of capital surges and help maintain the competitiveness of the
Philippine peso, the following measures were introduced:
Policy rates adjustment: During the global turmoil, policy rate reductions were implemented
to bring down the cost of borrowing, and increase business and consumer confidence for
economic expansion, among others.
Exchange rate flexibility: The BSP continued to adhere to a market-determined exchange rate.
The BSP monitored possible misalignments in the peso by looking at the movement of the real
effective exchange rate to determine if there was a high and persistent deviation from its long-
term average trend and whether such movements were supported by economic fundamentals.
Liquidity management: The BSP implemented fine-tuning of liquidity measures to increase
the effectiveness in managing the impact of surges in capital flows. The BSP expanded the
access to SDA to allow trust entities of financial institutions under BSP supervision to place
deposit into the facility. As growth in this facility rapidly accelerated during the GFC, the BSP
later clarified that non-residents are prohibited from participating in the SDA.
The BSP also deployed dollar liquidity measures during the intensification of the 2008-
2009 global financial crisis which assisted banks having US dollar liquidity needs and helped
domestic firms manage foreign exchange risks. These included the BSP’s US dollar repo facility,5
promotion on the use of banks’ hedging facilities and increasing the budget for Exporters’ Dollar
and Yen Rediscounting Facility (EDYRF).
4 BSP Report on Economic and Financial Development, 2010-2012; Yiu, M.S. (2011), "The Effect of Capital Flow
Management Measures in Five Asian Economies on the Foreign Exchange Market," HKIMR Working Paper No.41
5 In 2008, when the facility was introduced, a total of USD 43 million was availed of at a rate of 4.79 %. In 2009,
only USD 34 million was availed of at 4.5 %. There was no availment in the succeeding years.
18
Reserves accumulation: Despite episodes of heightened volatility, increasing level of the
country’s gross international reserves was observed as a defense in times of extreme stress in
the FX market.
Macroprudential management: The BSP issued new guidelines on internal capital adequacy
assessment process and BSP’s supervisory review process which applied to all universal and
commercial banks on a group-wide basis. It also utilised tools to aid macro-prudential risk
assessments, such as: (i) the Financial Stability Report, which serves to enhance the public’s
understanding of financial stability risks and vulnerabilities; (ii) macro-stress tests, which
assess the vulnerability of banks to shocks; and (iii) Senior Bank Loan Officers’ Survey, which
monitors changes in overall credit standards of banks.
FX reforms: Despite the uncertainties brought about by the GFC, the BSP continued to review,
liberalise and rationalise the FX regulatory framework, keeping these attuned to domestic and
global developments and taking into consideration international standards and best practices.
FX reforms included measures that were designed to: (a) encourage outflows so as to temper
the upward pressures on the peso and allow freer and more efficient capital flows in the long
term; (b) facilitate access to banking system resources for funding of legitimate transactions;
(c) broaden available financing options; and (d) provide opportunities for portfolio
diversification. While FX regulations were being liberalised to address surges in capital flows,
the BSP continued to maintain prudential regulations and supervision (monitoring/reporting/
registration) which allow the BSP to capture data necessary for policy review, formulation,
statistics and detection of impending crisis.
Capital market deepening: The BSP continued to support initiatives to further develop the
domestic capital market.
Regional and international cooperation: Standby regional agreements and pooling facilities
that can reduce pressure of reserves accumulation at the national level were established as a
precaution against external fluctuations. The BSP participated in regional monetary and
financial cooperation and integration (e.g., ASEAN Swap Arrangement, ASEAN+3 Chiang
Mai Initiative Multilateralisation (CMIM), BSP-Bank of Japan (BOJ) Bilateral Swap
Arrangement, BSP-BOJ Cross-Border Liquidity Arrangement, and ASEAN/ASEAN+3
surveillance mechanisms).
These measures reduced pressures on the exchange rate, financial stability and allowed the
BSP to keep monetary policy focused on its primary objective of maintaining price stability.
19
The macroprudential tools resulted in adequate bank asset quality that minimised Philippine’s
direct exposure to the bursting of US asset price bubbles during the Global Financial Crisis in
2008/09.6
6Amat, E. (2012), “Macro-prudential framework and analysis: A case study of Philippine banks.” In E.M. Bernabe, Jr.
(Ed.), Framework for macro-prudential policies for emerging economies in a globalized environment (pp.135-172).
20
C. Capital flows situation during 2013-2016
Notwithstanding the uncertainties in the aftermath of the GFC, the Philippines continued
to liberalise its capital account in accordance with the global thrust.
Following the Federal Reserve’s announcement of the quantitative easing, the country’s
financial markets experienced some strains, exposing the Philippine economy to more volatile
external conditions. Starting 2013, capital outflows were observed ranging from USD 2.23 billion
to the highest level of USD 9.6 billion in 2014.
In 2016, capital outflows amounting to USD 175 million were likewise observed. Capital
reversal was mainly attributed to heightened risk aversion of investors due to portfolio rebalancing
and search-for-yield behavior. The rise in US interest rates also encouraged investors to return to
US markets and retrench from emerging economies such as the Philippines.7
During the said periods of capital outflows, the Philippine peso depreciated against the US
dollar. The weakening of the peso was attributed to diverging global growth prospects,
asynchronous monetary policies, and increased geopolitical tensions. Global concerns on the US
Fed’s tapering of its bond purchases program and the Euro zone’s debt crisis were also behind the
peso’s depreciation. While there had been continued expansion in domestic liquidity which
provided support to the country’s vibrant economic activity, the inflation rate remained to be within
the target range over the horizon.
Implemented policies and their effectiveness
The BSP continued to adopt a mix of policies that were intended to maintain and promote
monetary and financial stability:
Exchange rate flexibility: The BSP continued to allow peso-US dollar exchange rate to be
determined by the market supply and demand. Thus, the exchange rate movement continued to
be supported by the underlying economic factors.
Macroprudential regulations: The BSP introduced the following measures to further enhance
the financial sector’s soundness by building banks’ resiliency and regulating ability to fuel
credit boom and engage in excessive leverage: (i) establishment of real estate stress test limit
for real estate exposures (thresholds for banks were set at 10% of the capital adequacy ratio
and 6% common equity tier (CET) 1 ratio after adjusting for stress test scenario);
(ii) setting of non-deliverable forward (NDF) transactions thresholds for banks at 20% and
100% of unimpaired capital for domestic banks, and foreign bank branches, respectively;
(iii) adoption of framework for dealing with domestic systemically important banks;
7 2016 BSP Annual Report
21
(iv) generation of Residential Real Estate Price Index (RREPI); and (v) adoption of Basel III
requirements;
Liquidity management: When the Interest Rate Corridor system was adopted in 2016, the
SDA facility was replaced by the term deposit facility.
Capital market deepening: The BSP continued to adopt measures that helped promote
development in the capital market.
FX reforms: The BSP continued its efforts to keep FX regulations attuned to local and global
developments. The reforms adopted were expected to: (a) further facilitate use of banking
system resources for funding of legitimate transactions and further improve the capture of data;
(b) further ease access to FX resources of banks for legitimate (trade and non-trade current
account) FX transactions; (c) provide Philippine residents greater flexibility in managing cash
flows and transacting in FX; (d) address demand for FX to fund resident-to-resident
transactions; and (e) improve and ease access to FX loans to fund projects and activities to
support economic growth.
The BSP implemented a wide array of macroprudential measures that complemented its
monetary policy measures to better respond to the challenges of maintaining financial stability
amidst a volatile external operating environment.
While volatile capital flows were observed reflecting sensitivity of financial markets to
external developments, positive developments in the domestic front (e.g., the country’s strong
economic growth, ample liquidity in the financial system, increased investor’s positive perception
on the Philippine economy) helped cushion the economy.
D. Capital flows situation in 2017
For 2017, capital flows to the Philippines reversed to a net inflow of USD 2.7 billion from
a net outflow of USD 175 million in the previous year. This was mainly boosted by significant
inflows of FDI buoyed by the country’s strong macroeconomic fundamentals and positive growth
prospects.8 Developments in the global economy heightened volatility in the exchange rate which
resulted in the weakening of the peso against the US dollar.
The foremost requirement to manage adverse capital flow situations (e.g., reversals,
sudden-stops) is by achieving sound macroeconomic fundamentals which support price
stability, a stable financial sector and fiscal discipline.
Such condition is requisite to deepening the capital markets and channeling private
investment and foreign capital flows to productive sectors of the economy. Nevertheless, the main
8 2017 BSP Annual Report
22
measures against potential financial imbalances brought about by adverse capital flow situations
is prudential regulation and supervision, which complements monetary policy. Strengthening
micro-prudential regulation that is compliant to Basel III provisions particularly the inclusion of
higher capital and liquidity requirements, is a necessary part of the toolkit. A right balance between
financial stability and well-designed regulatory reforms should make financial systems more
resilient while encouraging growth.
Another important step is pursuing further regional cooperation, which provides buffers
in times of crisis and learnings from the experiences of other jurisdictions when dealing with capital
flow surges or reversals. These cooperative efforts toward regional stability are achieved through
standby agreements and facilities that a country can tap into to mitigate the impact of a crisis.
Examples are the active participation of the BSP in regional monetary and financial cooperation
and integration (e.g., ASEAN Swap Arrangement, ASEAN+3 Chiang Mai Initiative
Multilateralisation, BSP-Bank of Japan (BOJ) Bilateral Swap Arrangement, BSP-BOJ Cross-
Border Liquidity Arrangement, and ASEAN/ASEAN+3 surveillance mechanisms), and the
lending facilities of the IMF (e.g., New Arrangement to Borrow and bilateral borrowing, where the
Philippines is currently a lender).
The BSP continuously enhances its network analysis to test vulnerabilities in terms of
interconnectedness of banks and corporates. The BSP likewise cooperates with other central banks
or international financial institutions for information sharing and surveillance. The BSP also
ensures timely and clear communication with financial institutions and market participants.
2.3) Malaysia’s experience
Capital flows situation
Over the past few years, the unwinding of the unconventional monetary policy by advanced
economies have resulted in volatile capital flows in EMEs, including Malaysia. This in turn has
affected most emerging market currencies, and ringgit was not spared. While all regional financial
markets were affected by the unwinding of non-resident investments, the impact on Malaysia was
more pronounced due to country-specific factors.
First, there have been imbalances in the demand and supply of foreign currency in the
domestic FX market despite Malaysia being in a current account surplus position for the
past 20 years. This was largely due to the fact that the conversion of export proceeds
into the ringgit had declined steadily over time (1% for 2011-2015; 28% for 2006-2010)
with a net conversion of USD 0.5 billion for the period of January to November 2016.
Despite the trade surplus, the demand for ringgit during this volatile period was not
forthcoming and not reflective to the underlying economic activities. This has led
23
Malaysia’s FX market to be unduly influenced by portfolio flows which resulted in the
ringgit being vulnerable to changes in sentiment and speculative flows.
Second, there were rising speculative pressures on the ringgit during this period from
the offshore market. Engagement with market participants revealed that flows in NDF
are largely speculative, as they do not have underlying ringgit-denominated assets. The
large size of the offshore ringgit-denominated NDF market (Figure 6) relative to the
onshore foreign exchange market led to large speculative or one-sided activity in the
NDF markets, which distorted the price discovery process (Figure 7). For instance, in
the days following the US presidential election in November 2016, ringgit-denominated
NDFs implied a much larger depreciation in the exchange rate than that implied by
foreign exchange forwards in the onshore market (Figure 8). Continuous trading
activities in the offshore NDF market (while the onshore market is only open during the
Malaysian trading day) and the US dollar’s appreciation during US trading hours have
resulted in sharp depreciations in the ringgit against the US dollar at the open of onshore
trading sessions. Thus, NDF market has generated higher volatility in the domestic
markets. As such, policy intervention was inevitable.
Figure 6: Ringgit NDF and FX onshore spot volume
*Data reflects interbank volume [Source: Bloomberg and Bank Negara Malaysia]
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2013 2014 2015 2016 2017
USD million
Daily Avg MYR NDF Volume Daily Avg USD/MYR Onshore Spot Volume*
24
Figure 7: Prices in NDF market
Figure 8: Malaysian Ringgit Forward Market
Period of US presidential election in October – November 2016
----- USDMYR onshore
----- USDMYR 1-Month NDF
MYR traded as high as 4.5500 in the NDF on 11 November vs onshore closing price of 4.2795
25
Implemented policies and their effectiveness
Malaysia implemented policy strategies that focus on prudential measures and financial
market development to address the specific concerns. Prudential measures have been implemented
to reduce external vulnerabilities that would undermine the domestic macroeconomic and financial
stability. In parallel, efforts were undertaken to develop a deep and vibrant domestic FX market to
meet the diverse and complex demands of a more developed and internationally integrated
economy. These efforts, which are guided by the long-term Financial Sector Blueprint 2011-2020,
complement the external buffers and resilient financial institutions that contribute to Malaysia’s
resilience against the capital flow volatility, including exchange rate flexibility and
macroeconomic strength that attract long term FDI flows.
Prudential measures: Post-AFC, rules were implemented to contain ringgit volatility.
From 2002 to 2013, these rules have been liberalised gradually and have evolved towards
enhancing efficiency and competitiveness of business operations (see Appendix 3). Currently,
Malaysia maintains liberal rules that are aimed to pre-emptively reduce external vulnerabilities by
encouraging longer term and more productive foreign exchange (FX) and cross-border capital
flows, that support the development of the economy and do not pose significant risks to Malaysia’s
balance of payment position and orderly functioning of the FX market. For instance, the prudential
limit on investment in foreign currency assets by residents with domestic ringgit borrowing is
aimed at pre-emptively managing any potential systemic risk to the financial system.
Developmental measures: In December 2016, with BNM having reaffirmed ringgit as a
non-internationalised currency9, the Financial Markets Committee10 (FMC) announced its first
series of initiatives aimed to promote a deeper, more transparent and well-functioning onshore FX
market. The requirement for the conversion of export proceeds into ringgit, for instance, is aimed
to ensure a better balance of supply and demand for foreign currency against ringgit, thus resulting
in continuous liquidity of foreign currency in the onshore market and further enhance the depth
and liquidity of Malaysia’s financial markets. The second series of the initiatives were introduced
in April 2017 to manage additional FX risk, improve the bond market liquidity as well as promote
fair and responsible market conduct. In September and November 2017, the third series of the
initiatives were announced aimed to further manage FX risk, improve bond market liquidity and
enhance liquidity intermediation (see Table 1).
9 As an enhancement to the existing rules, attestation is required for onshore banks to seek written confirmation from
the counterparty offshore bank that their FX transaction is not related to NDF trades. 10 Established in May 2016 which comprises representatives from BNM and key domestic industry players (i.e.,
financial institutions, insurance companies and corporations).
26
Table 1: Financial Markets Committee Measures
Measures undertaken Rationale
First series (December 2016)
Liberalisation of the onshore ringgit
hedging market
(a) Provide greater flexibility for market
participants to manage foreign exchange risks
Conversion requirement on proceeds of
export of goods11
(b) Rebalance the demand and supply of
foreign exchange in the onshore financial
market
Streamlined treatment for investment in
foreign currency assets
(c) Prevent excessive accumulation of domestic
debt by residents to fund investment abroad
Second series (April 2017)
Streamline passive and dynamic hedging
flexibilities for investors
Active hedging for corporations
(a) Additional FX risk management flexibilities
Liberalise regulated short-selling to allow
all residents to participate
(b) Improve bond market liquidity
New code of conduct for wholesale
financial market
(c) Promote high standards of market integrity
Segregated securities account at the large
value payment system, Real-time
Electronic Transfer of Funds and Securities
System (RENTAS)
Adopt the Legal Entity Identifier (LEI) for
RENTAS
(d) Strengthen financial market infrastructure
Third series (September and November 2017)
Hedging of MYR exposure arising from
trading of palm oil derivative contracts on
Bursa Malaysia by non-resident market
participants
(a) Additional FX risk management flexibilities
Introduce regulated Short-Selling of MGII
and Islamic banks under bilateral binding
promise concept
(b) Improve bond market liquidity
Issuance of Bank Negara Interbank Bills
(BNIBs) in MYR and USD to onshore
licensed banks
Expand eligible collateral for Monetary
Operations
(c) Enhance liquidity intermediation
The series of measures introduced by the FMC have been crucial to Malaysia’s success to
improve liquidity, depth and participation in the FX market. As a result, conditions in the domestic
financial market improved substantially (Figure 9) and is now more resilient to absorb shocks from
volatile global spillovers. There is more balanced FX flows from diverse set of participants, with
an increase of real sector flows, which accounted for more than half of the total flows. The share
of average annual flows increased to 39% for goods and 12% for services in 2017 from 2014-2016
11 BNM announced enhancement to the rules on 17 August 2018 where exporters are allowed to automatically sweep
export proceeds into their Trade Foreign Currency Accounts maintained with onshore banks to meet up to 6 months’
foreign currency obligations without the need to first convert proceeds into ringgit.
27
period at 25% for goods and 5% for services. The outflows from short-term non-resident investors
following the measures resulted in the composition of non-resident holdings in the domestic
financial markets moving towards more stable longer-term investors. The improved domestic
financial market conditions, which also coincided with Malaysia’s stronger-than-expected
economic performance, facilitated the appreciation of the ringgit in 2017 to better reflect
underlying fundamentals when global financial market conditions improved. More importantly,
the orderly functioning of the domestic financial market has continued to support Malaysia’s
economic growth.
Figure 9: Effectiveness of FMC Measures
Source: Bank Negara Malaysia
The state of ongoing uncertainties within global policy, economic, political, and financial
market development fronts will lead to periods of heightened volatility. In such circumstances, it
is important for an emerging economy like Malaysia to be able to implement the necessary policies
to address issues that are unique to the domestic environment in order to mitigate financial stability
risks.
2.4) Thailand’s experience
Capital flow situation
After the Asian Financial Crisis in 1997, capital inflows to Thailand slowly picked up
and turned positive since 2003. During the 2005-2006 period, capital inflows to Thailand
28
accelerated significantly and reached its peak at around USD 21 billion. This was due to surges in
both FDI and portfolio inflows as well as declining debt repayment outflows, resulting in
considerable appreciation pressure on the baht. A large portion of the inflows was investment in
short-term fixed income instruments and short-term deposits at commercial banks, hoping to
benefit from both the attractive yields and the baht’s anticipated appreciation.
In the post-GFC period, Thailand experienced more volatile capital flows as a result
of monetary policies in major advanced economies. This was particularly the case in 2011 and
2013 when capital flows volatility was more pronounced (Figure 10). In 2011, financial account
registered a net inflow of USD 5.2 billion during the first half of the year due to large influx of
portfolio investment and FDI. During the second half however, net capital movement registered a
net outflow of USD 13.5 billion due to three major reasons. First, heightened risk aversion as a
result of the sovereign debt crisis in the euro area prompted investors to curtail their holdings of
risky assets including equity securities in the region and Thailand. Second, banks continued to
receive foreign currency from exporters as previous hedging transactions matured, while new
transactions also fell as exports contracted in the fourth quarter. This led to an excess of foreign
currency, which allowed banks to repay their short-term debt obligations and increase their assets
abroad. Third, the BOT’s ongoing efforts to liberalise Thai Direct Investment since late 2010 have
also contributed to the outflows.
Figure 10: Thailand capital flows by type
Source: Bank of Thailand
In 2013, Thailand registered a net capital inflow although capital flow volatility remained
high. This reflected global financial conditions that had been affected by the Federal Reserve’s
monetary policy, as well as the political situation in Thailand at the time. The financial account
recorded a net surplus of USD 1.2 billion, a substantial decline from USD 14 billion in the previous
year. This largely reflected the net outflow of foreign portfolio investment after the large influx a
year earlier. At the same time, there was a net inflow of short-term and long-term borrowings,
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16 p
Outflows from Thailand by type
FDI Outflows Portfolio outflows Other investment outflows
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16 p
Inflows to Thailand by type
FDI inflows Portfolio inflows Other investment inflows
Million USD Million USD
29
including foreign direct investment, especially in financial institutions and insurance and automobile
related businesses. The outflow of portfolio investment followed the same pattern of regional
economies, with foreign investors selling both debt and equity securities. This was attributed to the
taper tantrum that took place in May 2013. There were also effects of the domestic political
situation towards the end of year. These were in contrast to the first quarter when there was a net
inflow due to buoyant global liquidity that was influenced by accommodative monetary policies of
major industrialised economies together with strong performance of the Thai economy. In
summary, Thailand has experienced more capital volatility over the recent years due to
uncertainties in both internal and external factors.
Implemented policies and their effectiveness
In order to manage capital flows and ensure economic and financial stability, the Bank of
Thailand (BOT) utilised a number of policies, including FX intervention, outflow liberalisation,
and anti-speculative measures as follows;
a) FX flexibility: In the face of speculative flows, the BOT allowed greater exchange rate
flexibility so that the baht can move more freely and be determined by its fundamentals.
b) FX intervention: The excessive exchange rate movements and rapid baht appreciation posed
a threat to economic stability and therefore warranted the central bank’s closer management.
The BOT conducted its FX purchase operations during the episode of capital inflows in 2006,
which resulted in a marked increase in gross reserves and a large net forward positions of
roughly USD 18 billion. This rate of reserve accumulation was significantly faster than that
during 2000–2005, when reserves grew only USD 5 billion per year on average.
c) Outflow liberalisation: To deal with excessive capital inflows and promote balanced flows,
the BOT has gradually relaxed regulations on outward direct investment in terms of the amount
limits since 2007 and finally removed the amount limit for both Thai companies and individuals
in 2010 and 2013, respectively. The BOT has also gradually relaxed regulations on portfolio
investment abroad since 2003, by allowing six types of institutional investors; namely
(1) the Government Pension Fund; (2) the Social Security Fund; (3) insurance companies;
(4) specialised financial institutions; (5) mutual funds; and (6) provident funds, to invest in
securities abroad, and in 2008 allowing retail investors to invest in securities abroad through
local intermediaries, upon approval by the BOT. In 2013, the BOT has removed the
requirement for both institutional and retail investors to seek prior approval from the BOT. In
2015, ten types of institutional investors have been allowed to invest in securities abroad.
Moreover, since 2016 the BOT has allowed qualified investors having financial assets as
30
specified by the BOT to invest in securities abroad without the need to go through local
intermediaries within limit set by the BOT. (See Appendix 4)
d) Measures to manage inflows: In general, Thailand welcomes investments from abroad
especially those which involved with real economic transactions such as trade and investment,
with fairly small restrictions on inflows. Large sums of foreign funds had flowed into the Thai
financial market to invest in a number of short-term fixed income instruments with the
objective of gaining from attractive yields and anticipated baht appreciation. Initially, the BOT
dealt with these inflows by allowing the baht to appreciate and conducting FX intervention to
curb excessive volatility as needed. As the upward pressure on the baht continued, the BOT
had to implement a number of measures to discourage such activities. For example, the
limitation on domestic financial institutions’ short-term baht borrowing from non-resident and
cap on outstanding balance of the non-resident baht bank account were introduced. (See
Appendix 4)
e) Unremunerated Reserve Requirement (URR): The speculative pressure forced the BOT to
implement the URR in December 2006. The measure served as a price-based friction on certain
types of inflows which were subject to 30% withholding at banks with no interests and
investors would get the full amount of reserve back after one year. The measure was eventually
lifted early 2008.
Box 1: The implementation of the Unremunerated Reserve Requirement
Toward the end of 2006, the upward pressure on the baht had intensified, with large sums of
foreign funds flowing into a number of short-term fixed income instruments with the objective
of gaining from attractive yields and anticipated baht appreciation. These put upward pressure
on the baht, which rapidly appreciated by 11.3% against the dollar in that year.
A range of macroeconomic tools were taken into consideration including both FX interventions
and policy interest rate adjustment. Active FX intervention was done while the policy rate was
kept unchanged at 5% to show commitment to maintaining price stability. However, FX intervention
had proven to be ineffective as expectations of the baht appreciation persisted. The BOT, then,
fell into the one-way bet scenario where intervention invited more speculative buying of the baht.
Consequently, the BOT implemented a number of measures to discourage such activities. For
example, for transactions whose tenor were not over three months, financial institutions were
allowed to borrow baht or enter into transactions comparable to baht borrowing from non-
residents for only up to THB 50 million per entity without underlying trade and investment, or
for up to the underlying value in September 2003. The outstanding balance of the non-resident
31
baht account at the end of day was allowed up to THB 300 million per non-resident in October
2003. Additional measures were being implemented on December 4, 2006, including extending
the coverage of measure to transactions whose tenor were not over six months, from the previous
three-month tenor. (See summary of the BOT’s anti-speculative measures in Appendix 4.)
Nevertheless, these measures together with increased foreign exchange interventions were not
quite effective as foreign investors could circumvent the measures and were able to find other
ways to speculate on the baht. As a result, the baht’s movement remained highly volatile and
continued to strengthen. Therefore, the BOT decided to implement the Unremunerated Reserve
Requirement (URR) measure on December 18, 2006 to serve as a price-based friction on the
types of inflows that were prone to speculation. Among others, such flows include new inward
investments in the form of foreign loans, fixed income instruments, mutual funds, property
funds, currency swaps, and non-resident baht accounts without proofs of genuine trade and long-
term investment underlying. Such inflows were subject to 30% withholding at banks bearing no
interests. Foreign investors would receive the full amount of the reserve withheld only if their
funds have remained in the country for at least one year, otherwise, a penalty would apply and
foreign investors would be refunded only two-thirds of the reserve withheld. Exempted from the
URR measure were inflows below USD 20,000, inflows related to trades in goods and services,
foreign direct investment and equity investment in the stock market.
As situations improved, the BOT gradually relaxed the URR measure over time. Subsequently,
foreign investors could opt to fully hedge their inward funds and be exempted from the URR for
certain types of inflows. The measure proved to be successful in stabilising the baht and reducing
the size of inflows to a more manageable level.
Figure 11: FX market before and after the implementation of URR
As shown in Figure 11, although the URR did not completely reverse the trend, the pace of
appreciation became much more moderate after its implementation. However, due to the
potential adverse effects of the URR measure on domestic businesses and its ineffectiveness in
the long run, the URR measure was lifted on March 3, 2008.
28
33
38
43
Offshore Onshore
Source: Reuters
URR
32
f) Macroprudential policies: Since 2000, LTV ratio, credit card and personal loans measures have
been implemented with varying degree of constraints to deal with capital inflows (See Appendix 4).
g) Policy mix: Clear and timely communication with the public has been pursued together with a
policy mix comprising of measures to further liberalise the capital account and policy interest
rate decreases. It has been observed that the BOT’s communication about the readily available
policy toolkits has lessened the pressure on baht appreciation.
The BOT used various tools to address risks associated with capital flows and such tools
were deemed to be effective as Thailand’s overall financial stability have remained sound. For
example, the URR proved to be successful in stabilising the baht and reducing the size of inflows
to more manageable levels. The LTV ratio was also effective in slowing down housing credit
growth and did not derail long-term credit growth (Figure 12), which is in line with international
experiences. Meanwhile, efforts to liberalise capital outflows since 2003 have resulted in a gradual
increase in outflows (Figure 13).
Figure 12: Mortgage loan outstanding and growth
Figure 13: Outflows from Thailand by type and selected measures
0
5
10
15
20
0
500
1,000
1,500
2,000
2,500
Mil
lions
Bah
t
Mortgage loan %YoY
Source: Bank of Thailand
Outstanding
-30,000
-20,000
-10,000
0
10,000
20,000
FDI Outflows Portfolio outflows Other investment outflows
Million USD
Note: Minus sign indicates an increase in outflows
Source: Bank of Thailand
Subsequent direct and portfolio investment
liberalisation from 2007 onward
Start of the direct and portfolio
investment liberalisation
Growth (RHS) Growth (%)
33
2.5) Lessons learned from countries’ experiences
Each jurisdiction has its unique social, political and financial policy environments to
operate on that is conducive to sustainable economic growth that attains stable inflation and
maximum employment. Nonetheless, in the ambit of international cooperation and increased
regional integration, there is scope for economies such as ASEAN not only to promote viable plans
and policies that will invariably benefit the ASEAN Member States, but also to build on each
other’s experiences and learnings from its various fora, committees and working groups.
The experiences of the four ASEAN countries elaborated in this report show that
different countries utilise different policies or measures to deal with their specific
situations. Notwithstanding this, there are common lessons on measures dealing with capital
flows that would be useful not only for ASEAN countries, but for EMEs in general.
First, capital flows usually provide benefits to a host country’s economy but certain
types of flows such as short-term portfolio investment and speculative flows are more volatile
and could pose risks to recipient countries. Moreover, these types of short-term foreign capital
tend to be large and can reverse quickly, depending on other factors that may not be related to
domestic fundamentals and policies of host countries. These external factors include global and
home country’s policies and economic outlook as well as market sentiments, or even herd behavior.
Movement of these capital flows, both in- and outflows, affect the host country through exchange
rate, asset prices and financial markets and therefore pose a major challenge for host countries.
Second, each country’s specific circumstances, such as financial market structure or
stage of development as well as economic cycles, play a crucial role on countries’ policy
choice. A mix of policies, ranging from exchange rate adjustment and reserve accumulation to
macroprudential tools and to foreign exchange measures, can be implemented to mitigate adverse
effects of capital flows in various manners. Policy flexibility is therefore essential as there is no
‘one-size-fits-all’ rule that could be applied to all countries at all times.
Third, when a country decides on a range of policy options, the focus is primarily the
outcome of the measures. In other words, the intent of imposing a measure is whether the measure
in question could address the country’s concerns, e.g. lessening exchange rate volatility or curbing
asset prices bubbles. This is regardless of how the measure is classified or labeled by others.
In addition, as major players of activities that induce large capital movement tend to be foreign
investors, measures to limit these activities often result in the different treatments between
domestic and foreign players.
34
Fourth, when emerging markets introduce capital account liberalisation policies,
there are often cases where policies need to be amended or fine-tuned. This is because policy
makers have to deal with market sentiments, investors’ perception and external factors which are
hard to predict. Thus, flexibility in formulating these liberalisation plans is crucial, otherwise they
are prone to be conservative and therefore less willing to allow liberalisation.
35
III. Implication from the IFI’s frameworks and views from the perspective of recipient
countries
The International Monetary Fund (IMF) had introduced an Institutional View in 2012,
as a guide for member countries in managing capital flows. As recognised by the IMF, the
Institutional View has no mandatory obligations and does not alter members’ requirements
and obligations under the IMF’s Articles of Agreements or under other international
agreements 12 . While the Institutional View does not presume full capital account
liberalization as a final goal, it does acknowledge capital flows management measures
(CFMs) as useful in responding to capital flows, discusses its appropriateness and provides a
brief classification of measures. This also includes the use of macroprudential measures (MPMs)
as well as situations that warrant their use. There have been two main frameworks to help ensure
that its advice on policies related to capital flows are comprehensive, namely (i) The Liberalisation
and Management of Capital Flows: an Institutional View13 and (ii) Macroprudential Policies
Frameworks.14 The application of the Institutional View on Capital Flows and Macroprudential
Policies in bilateral surveillance are outlined in their respective Guidance Notes to Staff. 15
Given the diversity in terms of stages of financial sector development among countries and
evolving country circumstances, the issues on capital account liberalisation and capital flows
management are dynamic and cannot remain a static framework. It should continue to be developed
and evolved through time. For emerging market economies like ASEAN, greater flexibility should
be permitted for the use of CFMs, as some of the financial market and exchange rate volatility are
affected by the mismatch between the size of capital flows and capital markets and amplified by
the prolonged period of low interest rates in the advanced economies. In this regard, CFMs are
important complements to other macroeconomic management measures. Authorities need to have
the flexibility in deploying all available tools in safeguarding macroeconomic and financial
stability. This may include having appropriate prudential measures that do not aim at capital flows
per se but rather at specific source of risks and financial fragility. This can play a crucial role in
dampening the risks of overheating in the economy. Various macroprudential measures have been
useful in dealing with this new reality, both from the standpoint of “leaning against the wind” or
12 Unless measures are inconsistent with Article VIII, Sections 2 and 3 on current payments and discriminatory
currency practices. 13 IMF 2012, “The Liberalization and Management of Capital Flows: An Institutional View” (Washington DC:
International Monetary Fund). 14 IMF 2013, “Key Aspects of Macroprudential Policy,” (Washington, DC: International Monetary Fund) and IMF
2017 “Increasing Resilience To Large And Volatile Capital Flows: The Role Of Macroprudential Policies”
(Washington DC: International Monetary Fund). 15 IMF 2013, “Guidance note for the liberalization and management of capital flows” (Washington DC: International
Monetary Fund) and IMF 2015, “Managing Capital Outflows - Further Operational Considerations” (Washington
DC: International Monetary Fund).
36
taming pro-cyclicality and increasing the resilience of the financial system. We should emphasise,
however, that the choice and the effectiveness of these measures are premised on the unique
context of each economy.
While existing guidance and frameworks from IFIs are indeed useful as a guideline,
however, based on ASEAN’s experiences they remain rather rigid and do not fully consider
country-specific circumstances. From ASEAN’s experience outlined in the previous section,
there are six elements that are important for policy makers to effectively address specific
challenges. The key issues of concerns are elaborated as follows:
Issue 1: IFI’s guidelines may provide a stylised view but may not fully incorporate all
country-specific circumstances or domestic factors
ASEAN countries with less developed financial markets face episodes of massive global
liquidity and sudden surges of capital flows. Such flows are usually disruptive and disproportionate
to their economies and domestic financial markets. Economic agents have to bear the burden of
sharp non-resident capital flow movements and increased vulnerability, such as to the price
adjustment in property and equity markets. Without proper and flexible policy responses that fully
take this factor into account, such massive capital flows could disrupt these financial markets and
pose risks to macroeconomic stability, public welfare, as well as the sustainability of economic
growth.
In Malaysia’s case for instance, the ringgit’s movements were increasingly being
influenced by the offshore NDF markets, the bulk of which reflected speculative activity and not
economic fundamentals. The authorities had to sustainably develop the onshore foreign exchange
market by addressing imbalances in the demand and supply of FX in the domestic FX market and
address the speculative pressures on the ringgit from offshore ringgit activities. In the case of
Indonesia, the combination of large portfolio flows and relatively shallow foreign exchange market
made the rupiah exchange rate volatile to portfolio investors’ behavior that was sensitive to
negative sentiments. This in turn contributed to volatility of rupiah exchange rate movement. Also,
the Philippines, an emerging economy with heavy reliance on the banking system for funding
economic growth, requires macroprudential measures that strike the right balance between
supporting credit-making as long as it is anchored on constructive growth dynamics, and increasing
resilience of banks to withstand downturns.
In addition, there seems to be a sharp difference in the conduct of monetary policy between
advanced and emerging market economies. A typical industrialised country can lower interest rates
in bad times without the fear of a sharp depreciation of its currency and can increase interest rates
in good times without the fear of attracting more capital inflows. This is not the typical case for
37
EMEs. This could be attributed to the fear of free falling in bad times and fear of capital inflows
in good times.16 The implementation of capital flow measures also depends on the country’s
economic and financial development and readiness as well as the mandates and domestic laws
governing the country.
Moreover, EMEs investors are diverse, comprising different participants, residents and
non-residents with different investment behaviors, appetites, time horizons, incentives, and trading
opportunities. Therefore, the flexibility to guide behaviors of such a diverse set of market
participants is highly necessary.
As it is generally accepted that capital flow liberalisation should depend on countries’
economic and financial development and readiness, capital flow management framework should
take into consideration countries’ specific circumstances, conditions and developments, as well as
their respective mandates and domestic laws. The IFIs may therefore explore the idea to: (a) group
the countries depending on comparability of their domestic developments; (b) engage in close
dialogue with them for better appreciation of their concerns and country-specific circumstances;
(c) focus on how countries can maximise benefits from capital flows safely and (d) arrive at a
capital flow framework that is more applicable, appropriate and tailored to the concerned group of
countries. The framework may include suggestions and recommendations to particular countries
on how to maximise the benefits of capital flows and outweigh their costs and risks, given their
mandates, domestic laws, policy landscape and the proposed policy changes or responses. The
framework must be flexible and agile to capture countries’ changing circumstances.
Issue 2: Recommendations on the adoption of CFMs should be more flexible
The IFIs’ frameworks seem to have macro-policies such as monetary policy and exchange
rate flexibility as the prime tools in dealing with capital flows. However, these macro-policy
adjustments may be inappropriate and ineffective especially if sharp capital flow episodes stem
from policies in other countries (more of this is discussed under Issue 3). Greater flexibility should
be given to the use of CFMs to address capital flows. Waiting for signs of a crisis or imminent
crisis before using any appropriate measures, as deemed fit by respective countries, can be too late
and could result in unintended consequences and deviate macroeconomic policy prioritisation from
domestic mandates in handling surges of capital flows.
Conventional macroeconomic adjustment may be ineffective or too slow to react to such
situation. Delaying action will result in potentially detrimental effects on stability with heavy and
16 Federico, Pablo. et.al, 2014. “Reserve Requirement Policy over the Business Cycle” National Bureau of Economic
Research, http://www.nber.org/papers/w20612.
38
long-lasting economic costs. In addition, there are limitations on the effectiveness of transmission
mechanisms for such conventional tools.
Taking Thailand as an example, there was a capital flows surge in 2006. Among the
macroeconomic toolkits ranging from exchange rate adjustment and foreign exchange
interventions to policy interest rate adjustment, the country decided to allow some appreciation
and use active interventions to slow down the appreciation path while keeping policy rates
unchanged at 5% to avoid sending a wrong signal to the markets on the central bank’s commitment
to maintaining price stability. However, these policies had proven to be ineffective as expectations
of the baht appreciation were sharp and persisted. As a result, the country faced with the one-way
bet scenario where intervention invited more speculative buying of the local currency.
Unlike earlier episodes, capital flows did not create a bubble in the real estate sector but was
rather channelled to the bond market. This is why the flows were not addressed by targeted
macroprudential measures. Hence, the BOT had to resort to imposing the URR measure. The
measure, while not popular, broke the momentum of the currency speculation and had provided
the private sector time to adjust to the rise in the baht. This reflects that in times of crisis, some
macro-adjustments have proved to be inefficient as it takes time to feed in to real economic activities.
It also depends on effectiveness of its transmission mechanism. Having to take a fair amount of
time to follow such recommendation may limit the ability to restore the situation from the crisis.
Learning from this episode, it may be difficult for countries to stick to a rigid rulebook when
facing with such situations. Therefore, when assessing such situations, it is important to allow
flexibility in applying prompt and appropriate measures. In addition, the Philippines’ experiences
regarding the capital flows have shown that managing capital flows could not necessarily be
addressed by sound macroeconomic policies alone considering the external factors and
uncertainties arising from global and local developments. Thus, the BSP used a combination of
policies where macroprudential measures were complemented by capital flow management
measures as necessary to maintain monetary and financial stability.
Moreover, MPMs alone cannot ensure resilience against destabilising effect of large capital
flows, hence CFMs are deemed to be an essential part of a policy toolkit to preserve financial
stability in certain circumstances. In some cases, capital flows could have a larger impact through
exchange rate channel on the real sector than on asset prices. The use of MPMs to increase
resilience to large and volatile capital flows may require broad-based measures that could have net
negative externalities on the whole economy.
Related to this point on flexibility in adopting CFMs as it depends on the situation that a
country faces, it is also useful if IFIs’ framework gives more consideration to the “effectiveness”
39
of a measure with respect to its objectives (i.e. whether a measure is effective in achieving its
intended outcome to resolve a particular situation).
Also, it remains unclear how to properly define “imminent crisis” or appropriate situations
where the use of CFMs is warranted. When it comes to short-term and speculative capital flows,
there should be preventive measures to discourage these flows. Therefore, preventive CFMs for
prudential reasons could be useful to limit the build-up of risk, prevent deadweight loss and reduce
social welfare costs. In such case, maintaining domestic resiliency could reduce the cost of global
welfare as a whole, while certain CFMs can effectively complement other measures.
Issue 3: In ASEAN’s viewpoint, the frameworks are rigid which may prevent pre-emptive
use of measures. This may in-turn lead to premature unwinding of measures that
could lead to renewed pressures.
From ASEAN’s perspective, the mechanical classification of measures into CFMs or
MPMs, as well as the views that CFMs should be used only temporarily and not pre-emptively
may restrict authorities in undertaking appropriate measures for specific circumstances. For most
emerging countries, it would be inaccurate to assume that CFMs must be temporary. It is crucial
to recognise that policies concerning capital flow management can entail difficult trade-offs for an
economy and at times be politically sensitive. Countries need to preserve flexibility in the
implementation of CFMs and other measures to manage the impact of volatile capital flows. High
inflows or outflows consistently create difficulty in managing macroeconomic and financial
stability. For instance, sudden capital flow surges or reversals can lead to disorderly exchange rate
fluctuations, which affect economic and financial stability, and subsequently dampen investor
confidence. This is particularly pertinent for EMEs. Therefore, each country should have the
flexibility to implement CFMs on a more permanent basis and as pre-emptive measures.
In the case of Indonesia, implementation of minimum holding period has helped to manage
short-term capital flows to Bank Indonesia Certificate. Bank Indonesia adjusted the minimum
holding period rule several times since its stipulation in 2010 through relaxation and tightening
through 2015 in accordance with the prevailing condition. Therefore, since managing capital flows
in ASEAN countries is a continuing issue, a rigid framework which stipulates that CFMs must be
put as temporary measures could make ASEAN countries’ macroeconomy more susceptible to
surge in capital flows.
In the case of Thailand, the URR was implemented in 2006 and was subsequently relaxed
and replaced with other preventive prudential measures, i.e. non-internationalisation of local
currency when the situation on the external fronts stabilised. The measures concerning the non-
internationalisation of local currency are not deemed as CFMs as they do not intend to affect capital
40
flows with legitimate underlying economic activities. Instead, such measures aimed at limiting
future speculative flows and safeguarding financial stability in the long-run. Some of these
measures have been used until now with the main objective to safeguard financial stability.
However, such measures are residency-based and may be considered as CFMs under the
aforementioned framework, and as such, implementing such measures would go against the
recommendation that CFMs should be temporary. Consequently, such recommendation puts
pressure on authorities to unwind the measures even though they are deemed appropriate to be
maintained.
Also, the IMF’s recommendation on managing inflow surges states for authorities “to lift
measures once the surges abate”. Furthermore, the IMF recommends that for disruptive outflows,
“CFMs should generally be used only in crisis situations or when a crisis is considered to be
imminent”. For example, the IMF’s advice to phase out Malaysia’s FMC’s measures could have
resulted in sub-optimal policy decisions, such as a premature removal of the measures. Flexibility
is required in order to undertake a prudent and effective judgment under varying circumstances
and challenges. In this regard, the IMF should distinguish the composition and sources of capital
flows in assessing the effectiveness and appropriateness of CFMs. For instance, limits on
speculative short-term inflows could be in place as a strategic way to prevent some of the volatility
associated with sudden surges or reversal of these flows. At the same time, these CFMs should not
discourage or deter long-term portfolio investments which are beneficial for economic and
financial development.
The effectiveness of CFMs in safeguarding financial stability takes time. Hence, a
premature removal of such measures before economic adjustments fully take place may create the
wrong signal to market sentiment. The market could perceive this as policy inconsistency and may
urge authorities to reimpose such measures if the situation persists. In doing so, it could trigger
negative market reactions 17 leading to negative feedback loops with negative impacts on the
economy. The IMF should also consider the asymmetries between inflow and outflow periods,
whereby inflow episodes tend to “start at different times for different countries” due to country
specific pull factors but “often tend to end together.”18 While the benefits of capital inflows may
take time to be transmitted to the real economy, the negative impacts of capital reversals tend to
be transmitted rapidly through the financial system and may be immediately disruptive to the real
sector. Hence, recommendations must be calibrated to take into account the different nature and
voracity of the outflows and the specific macroeconomic and financial objectives at hand.
17 CFMs can generate negative market reactions if they are costly for investors or are misconstrued, affecting future
willingness to invest (IMF Institutional View on the Liberalization and Management of Capital Flows, 2012) 18 IMF, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy
Framework”
41
Moreover, the guidelines or frameworks may be misused by other advanced trading
partners to pressure the authorities to lift measures prematurely if such measures are classified as
CFMs under the framework. When circumstances warrant, the use of measures should not be time-
bound, as it may reduce effectiveness in safeguarding financial stability. In order to prevent
excessive flooding of capital, some measures need to be maintained for a longer period of time
should the risks remain. Notable examples are measures regarding non-internationalisation of local
currencies adopted by Malaysia and Thailand which have to be put in place as long as there was a
need to curb currency speculation.
Issue 4: The definitions and classifications of measures can put more burden on the authorities.
Whether a measure is labeled as MPMs, CFMs or CFMs/MPMs, policymakers always
consider the tools that are most suitable and targeted at the source of risk, while disregarding the
label/nomenclature of such tools/measures. The classifications by the IMF that are based on
residency and purpose together with specific recommendations (e.g. for CFMs to be time-bound)
could unintentionally create an extra burden for policy makers when trying to effectively manage
capital flows.
One of the measures imposed by Indonesia relates to corporate external debt regulation
which requires hedging of net FX liability of corporates with external debt maturing within six
months. The policy, while related to capital flows, was not intended to limit capital flows per se,
but to ensure financial stability by enhancing corporate risk management on external debt. The
intricacy in the nature of a capital-flow-related measure may call for reconsideration of CFM
classification and whether it is suitable for various situations. Therefore, differences of view with
the IMF with regard to the classification could be avoided. It is important to get around a situation
where the IMF’s classification end up putting a burden on the authority to abolish the regulation
as soon as macro financial stability improves, while the regulation is actually needed preemptively
as a prudential measure.
From ASEAN’s perspective, some countries even view that the classification of measures
into categories such as CFMs or MPMs may be misleading and should be reviewed. This is because
of the overlapping nature of some CFMs and MPMs (e.g., a measure may be intended both to limit
capital flows and to tackle systemic risks arising from such flows). Moreover, the focus on
residency criteria oversimplifies the thought process on whether a measure is CFM or not. It may
be inappropriate to classify all residency-based measures as being designed to limit capital flows.
They may be driven by other considerations such as fiscal and social policies. In addition, a strict
definition and implementation criteria may restrict monetary authorities from effectively managing
capital flows. For instance, it may be more prudent to have all available options on the table, which
42
can be used in a policy mix combination, so that no single instrument is made to bear all the burden
of adjustment. Further work is needed in the calibration of CFMs/MPMs and how they interact
with other economic variables.
Moreover, the labeling of measures could have unintended consequences, particularly for
economies perceived to be vulnerable. Investors and media tend to focus on the restrictive measures,
which limit authorities’ ability to conduct policies using available policy tools.
Issue 5: The new classification of measures may lead to policy inaction or even discourage
and lead to hesitation towards capital account liberalisation.
Currently, ASEAN countries have made significant strides toward freer flows of capital in
the region. Therefore, having an appropriate mix of policies depending on prevailing circumstances
to preserve financial stability is crucial. The IMF’s framework on macroprudential and capital flow
management measures should serve as guidance to ASEAN countries. In this regard the framework
that does not limit members’ capacities to adopt measures deemed necessary to achieve their
respective mandates and preserve domestic stability is appreciated.
The adoption of safeguard measures in response to the risks of capital account liberalisation
creates an opportunity for ASEAN countries that have not reached the level of development
required for liberalisation. Once liberalisation efforts are committed and undertaken, it is difficult
to backtrack, given the possible costs and repercussions as well as the negative impression or signal
it can send to the international community. Moreover, the market sentiment is highly sensitive to
IMF’s view about the conduct of safeguard measures by member countries. The new classification
of measures may lead macroprudential measures to be labeled as capital flow management
measures, which could constrains authorities’ policy options thus leading to hesitation towards
capital account liberalisation.
Thus, prudence and safeguards should complement and support the liberalisation process
to mitigate possible resulting volatilities in capital flows. These may include prudential regulation
and supervision, as well as risk management which may not affect free flow of capital during
normal times. However, ASEAN countries should not take safeguard measures as substitute for
sound macroeconomic policies but may adopt them as deemed appropriate based on prevailing
domestic conditions and circumstances.
Liberalisation efforts should be undertaken in a calibrated and sequenced manner, taking
into consideration the prevailing circumstances and the domestic economy’s readiness vis-à-vis
global developments. These efforts have been consistently supported by (a) initiatives that would
further improve the resilience of the domestic banking system, deepen capital market and
strengthen macroeconomic fundamentals and (b) macroprudential measures and information
43
requirements that may safeguard the economy against external shocks, possible imbalances and
vulnerabilities.
In this regard, the IMF should strengthen its role as a trusted advisor in providing policy
advice to recipient countries’ capacity-building efforts in capital account liberalisation. These
could include, among others, financial market development and framework on assessing and
managing different types of capital flows. This should be conducted through constructive two-way
policy dialogue between the IMF and the authorities. Moreover, the authorities can also benefit
from a more regular multilateral assessment and review process for capital-flow-related policies
by the IMF.
Issue 6: Conversations between IFIs and recipient countries on spillovers should also entail
more emphasis on source countries, with IFIs facilitating such engagements, and
supported by greater international collaboration to mitigate capital flow volatility
The recent GFC emphasised the importance of collaboration amongst countries,
considering that the policy actions of the source countries may always have outward spillover
effects on other countries. As highlighted earlier, the GFC and an unparalleled easing of monetary
policy by the US and Japan resulted in a surge of capital flows to ASEAN countries. This led to
currency appreciation and asset price bubbles that led to recipient countries’ financial fragility.
Capital flows in response to these global development have important implications on recipient
countries’ capital flow management measures. In particular, recipient economies should be able to
reinforce appropriate policies to counter extreme capital flow volatilities and build cushions to
ensure resilience at the same time. Some ASEAN countries intervened in foreign exchange markets
to manage the short-term volatility in the exchange rate, which could hurt their economies and as
a buffer to the expected reversal of the volatile capital flows. Apart from fiscal policies, CFMs
have also been implemented to preemptively mitigate the potential domestic financial imbalances
that could arise from these capital flows.
Therefore, IFIs should give more consideration to recipient countries’ circumstances as a
result of spillovers from source countries. Even though the IFIs do recognize that source countries
can influence the scale and riskiness of global capital flows, the aforementioned frameworks on
capital flows tend to examine obligations on markets at the receiving end of the flows. As these
are typically emerging markets, such assessments therefore, may not provide enough consideration
on the negative spillover effects from source countries. Perhaps the IMF’s IV could be
implemented in a more holistic and sensitive way by strengthening IV’s coverage and analysis of
the outward spillovers of source countries’ policy measures, including unconventional monetary
policies. Similar to the IMF’s assessment of the appropriateness of CFMs, the IV should assess
44
source country’s policies in respect of their appropriateness as well as against other available
alternatives which may be less costly. This would complement the IV’s current focus on recipient
countries’ policy responses to spillovers from source country’s policies.
In addition, conversations between source countries and recipient countries as well as their
collaborative efforts may help them both to address challenges of capital flows in a systematic
manner and secure globally efficient outcome. Empirical findings by Ghosh et al. (2014) also
suggest that there may be scope for greater international cooperation in managing large and volatile
cross-border flows in order to tackle flows at both the source and receiving ends. Consequently, it
can lead to a more optimal outcome globally if the cost of imposing restrictions is not so high.
Collaboration between source and recipient countries could be the key to help prevent spillovers
from measures in one jurisdiction to another. Collaboration may include sharing of experiences
and best practices, which would be helpful in addressing any misalignment and possible
ineffectiveness of policies and approaches. Efforts to address capital flow vulnerabilities should
not only be a paramount concern of the recipient countries but also of source countries.
As not all aspects of concerns on capital flow can be collaborated, it is also imperative for
ASEAN countries to be vigilant and conscious of the developments not only in their respective
economies but also in the international markets. Source countries should also build macroeconomic
stability and be more conscious in conducting their monetary policies to minimise adverse
spillovers to other countries. On the other hand, recipient countries should deepen their financial
markets and increase financial system resilience and development in order to strengthen their
ability to absorb shocks.
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IV. Conclusions and policy recommendations
Experiences of selected ASEAN countries have shown that countries have been able
to timely and efficiently manage and mitigate adverse effects of volatile capital flows with
readily available policy toolkits. These include measures such as macroprudential measures and
capital flows management measures. Therefore, recommendations that may limit countries’ policy
space should be made taking into account, inter alia, the following factors:
The incorporation of country-specific issues into IFIs’ recommendations should be
considered a priority. Unlike those of developed countries, EMEs’ financial markets are usually
less developed, more vulnerable to sudden surges of global capital flows and often export-oriented.
Their ability to absorb shocks and withstand massive capital flows that could disrupt their financial
markets and destabilise their economies is limited. As a result, it is appropriate that IFIs take into
account country-specific circumstances, conditions and developments when making suggestions
and recommendations. In addition, due consideration should be given to preemptive use of
measures whose primary objective is to ensure the financial market stability. A rigid framework
that urges countries to prematurely unwind measures could lead to renewed pressures and financial
instability.
Furthermore, in ASEAN’s perspective, the IFIs should allow greater flexibility in
their frameworks. A rigid and mechanistic framework may not be the right solution for all as it
might impose undue constraints on countries already having limited policy tools. Restrictions on
possible combination of policy instruments could hamper macroeconomic management and hinder
economic stability of ASEAN countries. With reference to discussions at the IMF-BNM Seminar
on Capital Flows Management (2017), authorities were of the view that capital account
liberalisation is comparable to a double-edged sword for emerging economies. Therefore, it should
be based on countries’ readiness and be done in a feasible, well-sequenced and strategically-phased
manner so as to allow ASEAN countries to optimally reap the benefits of capital flows while
providing sufficient safeguards against adverse shocks.
In the longer term, IFIs should be more symmetric and receptive in its
recommendation by also taking into account the spillover effects from source countries
rather than concentrating solely on the recipient countries to respond in some prescribed
sequential manners. Essentially, IFIs should encourage further collaboration between source
countries and recipient countries. This is in line with the IMF’s Independent Evaluation Office’s
recommendation in 2015 that greater attention should be given to the sources of international
capital flows and what, if anything, could be done to minimise the volatility of capital movements.
46
More room to manage portfolio flows should be given to the recipient countries since the recipients
of portfolio flows are directly affected by the volatility of the flows.
Moreover, the IFIs could play a vital role in facilitating collaboration among source
and recipient countries. The recent GFC emphasised the importance of collaboration among
countries considering that policy actions of source countries may always have implications on
capital-recipient countries. Collaborative efforts of source and recipient countries may help both
source and recipient countries to address challenges of capital flows in a systematic manner and
help to secure globally efficient outcome.
Last but not least, there is room to deliberate whether the determined classification
of policies are suitable. It has been observed that a country decides on a range of policy options
based on policy objectives, rather than their classification given by IFIs. Moreover, the determined
classification of measures may discourage and lead to hesitation towards capital account
liberalisation.
Building on the momentum of this research paper, it is imperative for the ASEAN countries
to establish a regional view on the unconventional approach in managing capital flows to ensure
this concerted voice is sealed on a solid ground. The regional view will provide a comprehensive,
flexible and balanced approach for the management of capital flows.
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Appendix 1
IMF’s Institutional View on Liberalisation and Management of Capital Flows
For managing Inflow surges:
The appropriate policy mix depends on a variety of country-specific conditions, including
macroeconomic and financial stability, financial development, and institutional capacity.
In certain circumstances, introducing CFMs can be useful, particularly when underlying
macroeconomic conditions are highly uncertain, the room for macroeconomic policy
adjustment is limited, or appropriate policies take undue time to be effective.
CFMs could also be appropriate to safeguard financial stability when inflow surges contribute
to systemic risk in the financial sector. Systemic financial risks that are unrelated to capital
flows may be better addressed by macro-prudential measures that are targetted specifically to
deal with such challenges.
CFMs should be targeted, transparent, and generally temporary – being lifted once the surge
abates, in light of their costs.
When capital inflow surges contribute to both macroeconomic and systemic financial sector
risks, a measure that is designed to limit capital inflows in order to address such risks can be
both a CFM and an MPM. Some prudential measures can continue to be useful after a surge
abates for managing systemic risks. Their usefulness relative to their costs needs to be
evaluated on an ongoing basis, including by assessing whether there are alternative ways to
address the prudential concerns that are not designed to limit capital flows.
The diagram does not prescribe or take a view on the appropriate
combination of the three policies-only on circumstances under
which each might be appropriate.
Each circle represents cases where the relevant condition is met.
For example, the top circle (“Exchange rate overvalued”)
represents cases where the exchange rate is assessed to be
overvalued. The intersection of all three circles reflects cases
where the exchange rate is overvalued, reserves are judged to be
adequate, and the economy is overheating.
In such cases of limited policy flexibility, as represented by the
intersection of all three circles, CFMs can be useful to support,
and not substitute for, the needed macroeconomic adjustment.
CFMs could also be useful to safeguard systemic financial
stability under certain circumstances. At other times, CFMs can
help gain time when taking the needed policy steps requires
time, when the macroeconomic adjustments require time to take
effect, or when there is heightened uncertainty about the
underlying economic stance due to the surge.
48
For responding to disruptive outflows:
When responding to disruptive outflows, CFMs should generally be used only in crisis
situations or when a crisis is considered to be imminent. CFMs are more effective when they
are implemented as part of a broad policy package that includes sound macroeconomic policies
as well as financial regulations. They should be temporary, being lifted once crisis condition
abate, and may need to be adjusted on an ongoing basis in order to remain effective.
IMF 2012, “The Liberalization And Management Of Capital Flows: An Institutional
View” (Washington DC: International Monetary Fund).
The diagram does not prescribe or take a view on the
appropriate combination of the three policies-only on
circumstances under which each might be appropriate.
Each circle represents cases where the relevant
condition is met. For example, the top circle
(“Exchange rate overvalued”) represents cases
where the exchange rate is assessed to be
undervalued. The intersection of all three circles (the
area marked “c”) reflects cases where the exchange
rate is undervalued, reserves are judged to be
inadequate, and the economy is struggling. A
country in (c) is likely to be in crisis or imminent
crisis.
In such cases of limited policy flexibility, as
represented by the intersection of all three circles
alternative options, including official financing (e.g.,
UFR) and, in crisis or imminent crisis, introducing
temporary outflow CFMs and/or easing existing
inflow CFMs can be useful to support, and not
substitute for, the needed macroeconomic
adjustment.
In crisis circumstances, financial stability
considerations can also warrant CFMs to provide
breathing space while fundamental policy
adjustment is implemented.
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Appendix 2
Indonesia’s experience
Capital Flows in Indonesia
As an emerging country, Indonesia is in the course of developing its economy to a higher level.
This process certainly calls for capital which is beyond the size offered by domestic sources.
Accordingly, since the new order era, Indonesia has opened itself to foreign capital flows. Starting
earlier with FDI, capital has flowed to Indonesia in a number of forms. In addition to FDI, foreign
debt also surged up prior to the 1997 Asian crisis. In line with further development in the economy
especially in the financial sector, foreign capital inflows poured even more heavily into the country.
The type of capital inflows has also become more varied, including foreign portfolio investment.
In the meantime, global environment also evolved quite unprecedentedly. Following the GFC in
2008 and European debt crisis in 2010, central banks in crisis countries launched asset purchasing
programs – also known as quantitative easing. These programs were designed to facilitate their
accomodative monetary policy stance as their policy rates have reached the bottom 0%. Some even
went further to negative rates, such as ECB and BOJ. Quantitative easing consequently injected
ample liquidity to the economy. Due to slow economic recovery and gloomy economic prospect,
most of the excessive liquidity went to financial markets (stock and bond markets) and send
financial asset prices up – while reducing its rate of return. Afterwards, those liquidity flew to other
countries in search of higher return in particular to emerging market countries like Indonesia.
Capital inflows to Indonesia tend to increase post the global financial crisis in 2008. Figure 1 and
2 shows that capital inflows to Indonesia rebound in 2012, after a short drop in 2011, which
coincides with the beginning of current account deficit in recent years. Capital inflows to Indonesia
was dominated by Portfolio Investments (PI) flows, while Direct Investments (DI) and Other
Investments (mostly external debts and deposits) flows contributed by a smaller portion.
Overall in the period after 2008, capital flows fluctuated and pointed to the highest level in 2014
when net capital inflows reached more than USD 40 billion against the background of domestic
economic stability and still accommodative monetary policies in advanced economies. This
upsurge of capital flows occurred however after quite a strong fall in 2013, when capital reversal
hit most emerging countries including Indonesia due to taper tantrum. Capital reversal reoccurred
in 2015, as investors felt jittery over rising uncertainties in the global financial market due to
increasing expectation of Fed funds rate hikes, concern over Greece’s fiscal negotiation, and
unanticipated Chinese renminbi devaluation.
This high fluctuation of capital flows in Indonesia was due to the fact that a large part of the flows
was in the form of Portfolio Investments. Naturally, portfolio investments are risky as shifts among
types of portfolio assets and between countries could happen in a frequent and instant manner.
Portfolio investments are also highly sensitive to market sentiments, particularly negative ones.
All in all, inflows and outflows of portfolio investments are very influential to the asset prices and
exchange rates
On the other hand, Direct Investment (DI) to Indonesia was much less volatile and tend to be
positive as it continued to flow in along the line of relatively good domestic economic prospect,
supported by relatively strong domestic demand, long-term macroeconomic stability and continued
structural reforms. In addition, one must also not overlook Other Investments (OI) which include
foreign debts and deposits that tend to fluctuate as well. Nevertheless, OI movements have much
50
less influence over assets prices and exchange rates considering that payment (outflows) and
withdrawal (inflows) of foreign debts have been scheduled in accordance to loan agreement, thus
can be anticipated in advance and cause less impact on asset prices and rupiah exchange rate.
Figure 1: Indonesia’s BoP Figure 2: Capital Flows by Type
Put it more systematically, capital inflows to Indonesia is attributable to a number of push and pull
factors:
Push factors:
- Ample global liquidity. Extra accomodative monetary policy pursued by Advanced
Economies (AEs)’ central banks such as the Federal Reserves, European Central Bank,
Bank of England and Bank of Japan, through lowering of policy rate reaching zero bound
and followed by large asset purchases has uplifted global liquidity. The real sectors were
unable to largely absorb the ample liquidity, therefore it was mostly channeled to the
financial market.
- Low return. Since ample liquidity injected by AEs’ central banks could not be fully
absorbed by the real sector, it was invested in the financial market that boosted asset prices
but pushed down rate of return.
- Compressed risk premium. The racing for higher return was also supported by decreasing
risk premium, including risk premium for emerging market countries.
Pull factors:
- Higher rate of return. In general, investment return in EMEs – including Indonesia – is
higher than in AEs, and the spread between return in EME and AE even got wider –
meaning higher return – with lower risk premium.
- Solid and sound macroeconomic performance. Indonesia has maintained solid
macroeconomic performance, supported by sound and conducive policies. The country has
sustained high growth over the years, kept inflation in check and the exchange rate stable,
and continued structural reform programs.
- Investment grade rating. Indonesia sovereign ratings have been improved and
successfully reached investment grade that add to the country’s appeal.
Figure 3: GDP Growth Figure 4: Inflation
-15
-10
-5
0
5
10
15
20
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
*Q
2*
2010 2011 2012 2013 2014 2015 2016 2017
USD billions DI, net PI, net OI, net
* forecast
0,0
3,0
6,0
0,0
4,5
9,0
3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 911
2010 2011 2012 2013 2014 2015 2016 2017
% yoy% yoy CPI Core
51
Figure 5: Rupiah Exchange Rate Figure 6: Exchange Rate Development, 2017
The Impact of Capital Flows to Indonesian Economy and the Policy Response
Many economic textbooks and empirical research proved that capital flows is perceived to provide
benefits to the global economy, for both the source countries and especially the recipient countries.
Free flows of capital could facilitate efficient allocation of resources (capital) that would benefit
all. Certain type of capital flows – particularly direct investments – provides larger positive impact
in the form of new employment opportunity, transfer of technology and export potential. For
Indonesia in particular, capital flows can also help finance current account deficit and foreign debt,
or more generally finance all capital needs for development. Capital flows can also support
financial deepening in the foreign exchange, bond and stock markets. All of these benefits could
be reaped if the capital flows smoothly in accordance with economic fundamentals, and stays for
a long period of time.
On the other hand, these positive impacts may not occur if capital moves in and out in a quick and
abrupt fashion, and within a short term. Unfortunately, capital inflows to Indonesia in the form of
portfolio inflows tend to rise over the years but was very short-term, and therefore cannot be
utilised optimally to finance economic activities in the real sector. These portfolio inflows in
general is very sensitive to market sentiment as well as change in relative returns and technical
factors, and set aside economic fundamental factors.
These volatile portfolio flows had contributed to turbulences in Indonesian financial markets,
risking asset prices to fall and rupiah foreign exchange to depreciate. In turn, it brought challenges
to policy response in curbing negative repercussions to the overall economy. The volatile capital
flows had more negative impacts particularly when reversals occur. Capital outflows may be
triggered by reversal of favorable push factors (external shocks, including global negative
sentiment) and/or setback of pull factors (domestic shocks). In particular, capital reversal triggered
volatility in the financial market and fall in the prices of financial assets as well as depreciation of
domestic currency.
Capital flows can also bring about complication in the monetary management conducted by central
banks. During economic boom (strong growth and high inflation), capital flows may reduce the
effectiveness of monetary policy that is conducted thorough interest rate instrument. Effort to
reduce inflation by raising interest rate would only attract more inflows such that broad money
increase or cost of sterilisation rises, and vice versa.
Capital flows can also complicate monetary management as it makes the domestic exchange rate
shift away from its fundamentals (overshooting). It, therefore, does not only reduce its function as
a shock absorber (under flexible exchange rate regime) to external shocks, but even turns it into a
shock amplifier. Furthermore, exchange rate that is away from its fundamentals would mislead
economic agents in responding to exchange rate developments.
52
The volatile foreign capital flows and its corresponding challenges, together with the need to
maintain the resilience of external sector, urged Bank Indonesia to pursue a policy mix. Such policy
mix aims to (1) change the structure of capital flows to reduce its volatility and its impact on the
economy by preventing certain types of portfolio investment while also encouraging more long-
term capital flows such as FDIs; and (2) improve statistics to monitor capital flows (balance of
payments).
Various efforts were implemented through a series of policies since the GFC, including capital
flow measures and macroprudential measures, to strengthen the economic and financial system
stability that would in turn contribute to more sustained capital inflows. A range of policies pursued
by BI/Indonesia since the GFC were as follows:
a) Policy to encourage FDI:
Improvement of business climate to attract more FDI
b) Policy to maintain macroeconomic stability:
Strengthening policy mix to safeguard the macroeconomic and financial system stability.
Adoption of exchange rate flexibility of Rupiah along its fundamental value while still
maintaining market mechanism that aligns with financial deepening effort.
Maintaining adequate foreign exchange reserves taking into account possible capital
reversal. The accumulation of foreign exchange reserves is a byproduct of monetary policy
and is not specifically targeted to a certain level of foreign exchange reserves.
Foreign exchange (FX) market intervention was used to smoothen exchange rate
volatility, and was not aimed at attaining a certain level of exchange rate.
Current account deficit was guarded at levels that were sustainable and in line with
economic fundamentals.
Financial market deepening was accelerated in order to enhance its function as a shock
absorber, reducing price volatility in the financial market.
Mandatory use of onshore banks for withdrawal of export and foreign debt proceed.
Bank Indonesia Certificate (SBI) minimum holding period was implemented since 2010
to minimise the adverse impact from short-term capital inflows on monetary and financial
system stability, as well as to promote other transactions in the money market and to improve
effectiveness in monetary management. (Last adjusted in 2015)
Foreign currency reserve requirement was adjusted in 2011 not only to serve as a
monetary instrument to control money supply but also to safeguard banks’ foreign currency
liquidity. (Last adjusted in 2018)
Regulation on bank’s Net Open Position (NOP) was first implemented in 1989 and aimed
to mitigate banks’ foreign exchange (FX) risk exposure due to a range of possible changes
in external conditions. Since 2003, changes were made to the NOP policy to shift it from a
micro perspective to a more macro-based objectives, which includes financial deepening
and financial system stability. More specifically, adjustment of the NOP limit in 2010 was
aimed at strengthening monetary and financial stability as well as supporting medium and
long term growth through financial deepening, which includes deepening of the FX
domestic market. The latest adjustment to the NOP limit was in 2015 and aimed at further
improving bank’s flexibility in managing their FX exposures whilst still maintaining
prudential principles, and supporting financial deepening by introducing more depth in the
domestic FX market.
Regulation on bank’s short term debt was adjusted to minimise exposure to foreign
exchange risks. In particular, the ceiling on bank’s short-term debt was set to a maximum
53
of 30% of capital and an approval from Bank Indonesia was required for bank’s long term
debt. This regulation was further adjusted in 2013 by imposing relaxation particularly
concerning the types of short term debt to be included in fulfilling the requirement.
Rules governing foreign exchange transactions were implemented as part of the financial
deepening effort to help stabilise domestic financial markets. In particular, foreign exchange
transactions against the rupiah above certain threshold were to be supported by underlying
transactions in order to prevent speculative activities.
Corporate External Debt Regulation was implemented in 2014 to strengthen the
resilience of corporations that have foreign debt through the adoption of prudential
principals. This regulation, consisting of hedging, liquidity and credit rating requirements,
aims to enhance corporate risk management practices of non-banks which will ultimately
lead to rupiah economic stability in general. (Last adjusted in 2016).
c) Macroprudential measures
- Loan-to-Value (LTV) ratio and Down Payments (DP) on motor vehicle loans was first
implemented in 2012, which aims to safeguard financial stability by mitigating the buildup
of macrofinancial risks in the housing and motor vehicle sector. LTV functions as a
countercyclical tool to moderate mortgage loan creation and influence demand. This policy
is evaluated at least once a year and had been adjusted several times in accordance to the
credit cycle (adjustments made in 2013, 2015, 2016 and 2018).
- Secondary Reserve Requirement was first introduced in 2009 and later adjusted in 2013
to further enhance banks’ resilience to liquidity risk on the back of rising inflationary
pressure, current account deficit and other external pressure, which could adversely impact
market liquidity and disrupt stability of the financial sector. In 2018, the secondary reserve
requirement was replaced by the macroprudential liquidity buffer (MPLB). The MPLB is a
countercyclical tool used to counter banks’ liquidity procyclical behavior. It aims to manage
speculation or excessive risk-taking due to oversupply of liquidity (mostly when credit
growth is at an expansionary path) as well as to provide better liquidity flexibility to banks
in times of stress (i.e. it can be used for repo to Bank Indonesia). The MPLB level is adjusted
based on the credit cycle, complementary to the Countercyclical Capital Buffer (CCB).
- Loan to Deposit Ratio-based Reserve Requirement (LDR-based RR) was first
introduced in 2010 to strengthen resiliency of the banking sector and optimize banks’
intermediary function amidst worsen economic condition triggered by rising inflationary
pressure. This was done by setting an optimum intermediation range with the provision of
reserve requirement incentives and disincentives that takes into account bank’s capital
adequacy level. In 2015, the LDR was changed into the Loan to Funding Ratio (LFR) based
RR, to support financial deepening by accommodating a broader based funding through the
inclusion of securities issued by banks, as well as support financial inclusion initiatives by
creating an incentive to surpass the upper band limit of up to 94% shall the bank meet its
SMEs target loans. In 2018, further refinements to the LFR-based RR were made in which
securities purchased by banks were also allowed to be acknowledged as banks’
intermediation (to the real sector via the financial market). This new LFR-based RR was
named the Macroprudential Intermediation Ratio (MPIR) and applies to both conventional
and sharia banks.
- Countercyclical Capital Buffer (CCB) was implemented in 2016 at 0% and has been
evaluated every 6 months. The CCB functions as a countercyclical tool to mitigate the
54
buildup of systemic risk from excessive credit growth. It has remained 0% since its
implementation.
d) Improvement of statistics to monitor capital flows:
- Refinement of BOP statistics.
- Introduction and improvement of Banks Daily Report, which includes foreign exchange
(FX) transactions in the spot, forward, swap and options markets, which can be utilised to
monitor FX supply and demand, including from non–residents (capital flows).
These policies were pursued adjusting to specific circumstances in relation to macroeconomic and
financial stability. In the period of 2010 to mid-2013 for instance, the implementation of minimum
holding period of SBI had been quite effective in dampening the volatility in the SBI market,
including lowering foreign capital inflows placed in SBI. In the other direction, subsequent
lowering of the minimum holding period in 2013 post the taper tantrum and capital reversal had
helped in stabilising the capital flows in Indonesia.
Other measures imposed to maintain stability such as the requirement for corporations to hedge
their incoming FX debt repayment, together with countercyclical macroprudential tools had also
contributed to stability and resilience of the financial system. After the implementation of hedging
requirement and minimum liquidity ratio in 2014, corporate external debt was no longer on the rise
and was stable at around USD 160 billion since 2015. The FX debt hedging requirement led to
quite significant increase of the forward transactions which in turn helped improve the structure as
well as the deepening of domestic FX market. As a result, it contributed to lower volatility of the
rupiah exchange rate. Likewise, the LTV ratio has also played a role in returning stability as
evidenced by a slight slowdown of the growth of mortgage loans.
It is important to note that while the aforementioned policies were primarily aimed to promote
stability and sustainability of the Indonesian economy, these have in turn helped foster investors’
confidence. This is evidenced by the fact that FDI inflows to the economy returned since the fourth
quarter of 2013 after a rather sharp reversal earlier in the year as overall macroeconomic and
financial stability was kept intact.
In more detail, some of the main measures mentioned above and its implementation in recent year
are elaborated in the subsequent Table 1.
55
Table 1: Highlight of Indonesia’s Selected Stability Measures
Stability Measures Background/Rationale Regulation Impact
1. SBI Minimum Holding Period
July 2010: One month
holding period
After GFC in 2008, AEs implemented
quantitative easing (asset purchase). It
created ample global liquidity mostly
invested in financial assets and pushed
capital flows to EMEs in search for higher
returns.
Capital flows surged to Indonesia –
dominated by short-term portfolio
investments (PI) – and invested in Bank
Indonesia certificate (SBI), government
bonds, corporate stocks, etc.
Capital flows to SBI complicated monetary
management. It increased volatility in SBI
market, as well as in FX market. It becomes
more problematic when BI has to manage
inflation by increasing policy rate that will
invite more capital inflows.
Every party –resident and non-
resident – who buy SBI is not
allowed to sell it back in the
secondary market during a
regulated time period since the
date of purchase of the SBI
This policy is intended to
strengthen monetary policy by
minimising disruption from short
term capital inflows invested in
monetary policy instrument.
This policy was also expected to
promote other transactions in the
money market and to improve
effectiveness in monetary
management.
The policy was quite effective in
dampening the volatility in the SBI
market, including lowering foreign
capital inflows placed in SBI (Figure
C.1).
Further, the declining short term
inflows to SBI also reduced the
volatility in the FX market.
May 2011: Six month
holding period
The extension form one to six month
holding period lowered further short
term capital inflows to SBI.
September 2013: One
month holding period
Subsequent adjustment from six to
one month holding period was
aimed at relaxation, post the taper
tantrum that had led to a sharp drop
in capital inflows to Indonesia.
September 2015: One
week holding period
Further adjustment from one month
to one week holding period was
under the consideration that capital
flows to SBI did not increase
volatility.
2. Adjustment to Foreign Exchange Reserve Requirement
February 2011:
Increase FX RR
The surging capital inflows to Indonesia had
pushed up bank’s foreign currency liquidity.
This excess FX liquidity coupled with short
term portfolio nature of the capital inflows
raised the risk of foreign currency instability
which would threaten macroeconomic
stability as a whole.
Foreign exchange reserves
requirement was raised to 8% of
third party fund (previously 1%).
Rupiah volatility throughout the
present was maintained below peers
average
56
Stability Measures Background/Rationale Regulation Impact
April 2018: adjustment
of FX RR calculation
Since 2016, Bank Indonesia had launched
initiative to reformulate the operational
framework of monetary policy which is
aimed to increase the effectiveness of
monetary policy transmission.
In 2018 an adjustment to the calculation of
FX RR was considered necessary as part of
the reformulation initiative.
Without changing the requirement
of total 8% FX RR, the
calculation was adjusted from all
on daily basis to a combination of
daily FX RR (6%) and average
FX RR (2%).
The averaging part is functioned
as interest rate buffer to absorb
interest rate volatility in the
financial market. The averaging
of FX RR also gives room for
banks to increase the efficiency of
its liquidity management.
The measures was set to be effective
starting October 2018.
3. Loan to Value (LTV)
2012: LTV ratio and
Down Payment for
Automotive Loans
2013: revision to LTV
regulation (tightening)
At its core, the LTV policy aims to maintain
financial system stability and bolster banking
resilience through prudential principles. This
is achieved by, among others, slowing the
concentration of credit risk in the property
sector as well as promoting the application of
prudential principles when disbursing credit,
in order to preserve sustainable growth of the
property sector over the medium and long
term. On the other hand, the LTV/FTV
regulation also aims to provide low and
middle-income earners a greater opportunity
to acquire appropriate housing as well as
simultaneously enhance aspects of consumer
protection in the property sector.
The 2012 regulation governs,
among others, maximum limits
on the Loan lo Value (LTV)
ratio on Mortgages Loans for
Landed Houses (KPR) and
Flats (KPRS) with area
exceeding 70 m2
In 2013, the revised regulation
apply a progressive LTV/FTV
ratio. The primary objective of
the regulation is to anticipate
potential default risk
attributable to weaker
repayment capacity.
The coverage of the new LTV
regulation include shop-houses
and office-houses and applies
The adjustment had resulted in
slight slowdown of the growth
of these loans in 2013 (Figure
C.2).
The LTV regulation supported
more stability and sustainability
of the economy, which in turn
helped restore investors’
confidence.
Capital movement inflows
returned in the fourth quarter of
2013 after quite a sharp reversal
earlier in the year, contributing
to capital and financial account
surplus of USD 9.2 billion
which was higher than the
previous quarter.
57
Stability Measures Background/Rationale Regulation Impact
Central and regional government housing
schemes are exempt from the aforementioned
regulation.
In 2013, The LTV/FTV regulation was
amended due to excessive credit growth in
the property sector, particularly for houses
and high-rises (flats and apartments)
subsequent to the introduction of the
LTV/FTV regulation in the middle of 2012.
Excessive growth in the property sector has
also affected borrower behaviour in terms of
utilising bank loans/financing.
to both commercial banks and
sharia banks.
The new LTV/FTV policy
regulates: (1) the treatment of
married borrowers; (2) the
handling of top-up credit
facilities and new financing
based on the property used as
collateral from the previous
loan; and (3) restrictions on
banks providing top-up
credit/financing facilities to
meet downpayments on
mortgage loans and/or
property-backed consumer
loans/financing.
2015: relaxation of
LTV (FTV) and Down
Payment for
Automotive Loans
The LTV regulation was relaxed in an effort
to maintain the economic growth momentum.
Considering further development in 2015
regarding the need to boost credit for the
economy, the LTV regulation was relaxed.
The extension to Financing to Value (FTV)
was aimed to give more space for banks to
enhance its intermediary function by relying
not only on third party funds.
The LTV/FTV ratio for
housing loan/ financing (KPR)
was raised 10% for landed
houses, apartments as well as
home stores/home offices from
21m2 to 70 m2 and above and
down payment for motor
vehicles (two-wheelers and
three-wheelers nonproductive)
were reduced by 5%.
In order to mitigate risk and
avoid escalating potential
credit/financing risk, the new
LTV/FTV policy and
downpayments could only be
applied by banks that meet a
The relaxation did not cause a spur
of capital inflows into Indonesia.
Financial and capital account surplus
year on year declined somewhat by
the end of 2015 compared to the
previous year.
58
Stability Measures Background/Rationale Regulation Impact
certain minimum requirement
of non-performing loans
(NPL), or non-performing
financing (NPF).
2016: relaxation of
LTV (FTV) and Down
Payment for
Automotive Loans
The LTV and FTV ratio on housing loans, as
well as downpayments on motor vehicle
loans was further refined in order to stimulate
banks’ intermediation function while
maintaining prudential principles and
consumer protection.
Four amendments were made:
(i) The ratio and tiering of
housing loans and financing
were changed for the 1st, 2nd
and 3rd facilities; (ii) The
requirements for total NPL and
NPF of less than 5% were
changed from gross to net; (iii)
Top up loans from commercial
banks and new financing from
Islamic banks or sharia
business units for existing
financing shall apply the same
LTV and FTV ratios as long as
the loan is a performing loan;
and (iv) Housing loans and
financing for incomplete
property are permitted up to the
2nd facility with phased
liquidation.
2018: relaxation of
LTV (FTV) regulation
To further induce economic growth, in 2018,
BI continued to relax the LTV regulation.
The LTV/FTV policy is part of Bank
Indonesia’s policy mix instituted to stimulate
economic growth by inducing growth in the
national property sector, which still has the
potential to be accelerated.
Through the new policy, Bank
Indonesia has authorised the
banking industry to manage the
LTV/FTV applicable to the
first mortgage facility in
accordance with the borrower
analysis and risk-management
policy of each respective bank.
59
Stability Measures Background/Rationale Regulation Impact
The relaxation includes (i) relaxation of the
LTV ratio for property loans and FTV ratios
for property financing, (ii) relaxation of total
loan or financing facilities through indent
mechanism, and (iii) regulation of the stages
and amount of credit / financing
disbursement.
Pursuant to the previous
LTV/FTV regulation, the first
mortgage facility for a landed
house of ≤70m2, apartment of
≤21m2 and home store/home
office was set at the discretion
of each respective bank. By
relaxing the policy, the affected
house types have been
expanded to landed houses and
apartments of >70m2 and
apartments of 22-70m2. When
determining the magnitude of
the LTV/FTV policy for each
borrower, however, the banks
are required to comply with
prudential principles, meaning
that only banks with a net total
NPL ratio of <5% and a gross
NPL ratio on housing loans of
<5% may benefit from the new
policy. Since the regulation
was first issued, central
government and local
government housing programs
are still exempted.
4. Secondary Reserve Requirement
2009: Secondary RR
was first implemented
2013: Adjustment to
Secondary RR
The global economy and financial
turbulences following the GFC could
potentially have an adverse impact on bank
liquidity. Thus, there was a need to instill
The Secondary Reserve
Requirement was initially set at
2.5% of the third party funds in
rupiah (TPF).
The adjustment of the RR and
LDR and other policy responses
by BI and the government had
succeeded in gaining stability
60
Stability Measures Background/Rationale Regulation Impact
2018: The secondary
RR was changed into
the Macroprudential
Liquidity Buffer
(MPLB)
greater liquidity flexibility for banks in order
to mitigate increasing liquidity risk that could
disrupt the overall banking system stability.
Adjustments to Secondary Reserve
Requirement in 2013 were intended to
increase banks’ liquidity buffer on the back
of rising inflationary pressure, current
account deficit and other external pressure
which could adversely impact market
liquidity and disrupt stability of the financial
sector.
The MPLB imposed in 2018 is a
countercyclical tool used to counter banks’
liquidity procyclical behavior. Similar to the
previous secondary RR, it aims to manage
speculation or excessive risk-taking due to
oversupply of liquidity (mostly when credit
growth is at an expansionary path), but at the
same time, it also aims to provide better
liquidity flexibility for banks in times of
stress (i.e. it can be used for repo to the
central bank). The MPLB level is adjusted
based on the credit cycle, complementary to
the Countercyclical Capital Buffer (CCB).
In 2013, the Secondary RR was
increased to 4% of the third
party funds in rupiah (TPF).
The instruments acknowledged
as Secondary RR were
extended to include Bank
Indonesia Certificates of
Deposits.
The MPLB regulation applies
to both conventional and sharia
banks. It was first stipulated in
July 2018 and set at 4% of the
third party funds in rupiah
similar to the previous
Secondary RR rule. The
regulation stipulated that 2% of
the third party funds in rupiah
can be used for repo to Bank
Indonesia.
In November 2018 the
percentage of MPLB that can
be used for repo to BI is
increased to 4%
and restoring investor
perceptions of the outlook for
investment in Indonesia
In the fourth quarter of 2013, the
capital and financial account
booked a surplus of USD 9.2
billion, higher than that of the
previous quarters. This rise was
attributable to foreign capital
inflows in other investments and
portfolio investments, in
particular Indonesian
government bonds. Direct
investment was also maintained
in surplus, albeit down from that
of the previous quarter due to
ongoing uncertain global
economic and financial
conditions.
In 2014, investors remained
resolute in their holdings of
domestic financial assets as the
position of non-resident
investments in Indonesia’s IIP
increased to USD 419.8 billion
from USD 370.5 billion in 2013.
The positive perception of
investors concerning economic
stability in Indonesia, coupled
with attractive returns, exceeded
negative global and domestic
sentiment in 2014.
61
Stability Measures Background/Rationale Regulation Impact
5. LDR-based Reserve Requirement
2010: LDR-based RR
was introduced
2013: Adjustment to
LDR-based RR
2015: The LDR-based
RR was changed to
LFR-based RR
LDR-based RR was first introduced in 2010
and refined in 2013 on the back of excess
liquidity and rising inflationary pressure,
which heightened the need to strengthen
resiliency of the banking sector and optimize
banks’ intermediary function. This is done
by setting an optimum intermediation range
with the provision of reserve requirement
incentives and disincentives that takes into
account bank’s capital adequacy level.
In 2015, the LDR-based RR was changed
into the LFR-based RR to support financial
deepening by accommodating a broader
based funding through the inclusion of
securities issued by banks, as well as support
financial inclusion initiatives by creating an
incentive to surpass the upper band limit of
up to 94% shall the bank meet its SMEs
target loans.
Initially the LDR-based RR set
an LDR target range of 78% to
100%, with an exception for
banks that have capital above
14%. They are allowed to
surpass the upper band limit.
In 2013, the upper band limit
was changed from 100% to
92%.
In 2015, the LFR changed the
lower band limit of 100% to
78% so the target range
became 78% to 92%. Banks
could surpass the upper band
up to 94% if banks have
fulfilled their SMEs financing
target and have gross NPL of
SMEs and total loans less than
5%. Securities issued by banks
that are allowed to be
accounted as funding include
MTN, FRN and bonds (other
than subordinated bonds)
subject to several other criteria
(i.e. rating).
Banks that could not achieve
the LFR target range shall be
subject to a requirement of
additional statutory reserve
requirements (RR).
In the fourth quarter of 2015,
foreign portfolio inflows
rebound and increased. External
debt in the other investment
category also increased in the
second half of 2015, especially
long term debt.
The relaxation to the new RR-
LFR has contributed to stronger
economic growth and investors’
positive perception to the
Indonesian economy. This,
coupled with attractive return
had led to increased capital
inflows toward the end of 2015.
62
Stability Measures Background/Rationale Regulation Impact
2018: The LFR-based
RR was changed into
the Macroprudential
Intermediation Ratio
(MPIR)
In 2018, further refinements to the LFR-
based RR were made in which securities
owned by banks were allowed to be
acknowledged as banks’ intermediation (to
the real sector via the financial market). This
new LFR-based RR was named the
Macroprudential Intermediation Ratio
(MPIR). The enhancement was made to
reinforce financial deepening.
The MPIR target range was set
at 80% to 92% with the same
capital adequacy minimum
incentive of 14% to surpass the
upper band limit.
Securities owned by banks that
are allowed to be accounted in
the MPIR include non-bank
corporate bonds or sukuk
subject to several other criteria
(i.e. rating, ownership, etc.).
The new policy applies to both
conventional and sharia banks,
whilst the previous LFR-based
RR only applied to
conventional banks.
6. Countercyclical Capital Buffer (CCB)
2016: Effective at 0%
as of January 2016
The CCB functions as a countercyclical tool
to mitigate the buildup of systemic risk from
excessive credit growth.
The CCB is set at 0% and is
evaluated every 6 months.
7. Regulation on Bank’s Net Open Position (NOP)
NOP limit was first
implemented in 1989
and has changed many
times taking into
account the economic
cycle.
The policy was implemented with an aim to
mitigate banks’ foreign exchange (FX) risk
exposure due to a range of possible changes in
external conditions. Excessive net open FX
position can expose banks to material losses
due to the volatility of the underlying
currencies.
Since 2003, changes were made to the NOP
policy to shift it from a micro perspective to a
more macro-based objectives, which includes
1989: NOP 25% end of day
1994: Overall (on & off B/S)
NOP end of day 20% of capital
2003: Overall NOP end of day
(20%); & overall end of day
incorporating market risk (30%)
2004: Overall NOP end of day
(20%); and NOP of Mid & End
of Day Balance Sheet (20%)
63
Stability Measures Background/Rationale Regulation Impact
financial deepening and financial system
stability. 2005: Overall NOP & end of
day balance sheet (20%); and
NOP at any time (20%)
2010: Revocation of Balance
Sheet NOP,
Overall NOP end of day (20%);
and NOP 30 Minutes (20%)
2015: Revocation of 30 Minutes
NOP, Overall NOP end of day
(20%)
8. Adjustment of Bank’s Short-Term Debt Regulation
August 2013:
Relaxation of Bank’s
Short Term Debt
Regulation
Global economic challenges in 2013
worsened Indonesia’s external balance and
put pressure on the rupiah.
Under the existing regulation, banks were
required to include non–resident Rupiah
checking account as short term debt
(regulated to be limited up to 30% of bank’s
capital). This in turn put pressure on the
Rupiah since banks accordingly asked non-
resident customers to convert their rupiah
fund to foreign currency.
Under regulation stipulated in
2005, banks are obligated to limit
its daily outstanding short term
debt up to 30% of bank’s capital.
This regulation was relaxed in
2013, whereby non-resident‘s
checking account funded from
certain types of transactions are
excluded from the calculation of
bank’s short term debt.
The 2013 policy is intended to
reduce demand for foreign
exchange from non-resident.
Banks previously required their
non-residents customers to convert
their rupiah current account to
foreign exchange in order for
banks to meet the 30% short term
debt limit.
While the Rupiah was under
pressure, which was similar with the
currency of other emerging country
peers, the volatility trended down
since Q4 2013 through 2014.
9. Rule on Foreign Exchange Transactions
64
Stability Measures Background/Rationale Regulation Impact
September 2014:
Regulation on Foreign
Exchange
Transactions against
Rupiah between Banks
and Domestic Parties
2013-2014 global economic uncertainty
among others from the Fed’s plan for policy
normalisation had spurred a worsening of
external balance with pressure on current
account and financial account (capital
outflows). Rupiah was accordingly under
pressures. In the meantime, Indonesia’s
shallow financial market add to the risk of
volatility, including from foreign exchange
transactions not backed by real economic
activities.
Foreign exchange transactions
against Rupiah performed by
banks with customers above
certain thresholds must have
underlying transactions, with the
scope of underlying transactions
wide enough to give flexibility.
The measures is expected to
prevent speculative activities as
well as encourage the deepening of
domestic foreign exchange market
through enhancement of foreign
exchange transactions that relate to
economic activities, and to
contribute to financial market
stability
The policy is part of BI’s various
measures to deepen domestic
financial market, which overall has
contributed to more active FX
market as reflected in higher daily
transaction volume (increasing
11.7% in 2015 from 2014; or 0.52%
of GDP in 2015 from 0.48% in
2014).
Another indication of more active
FX market is the decline of rupiah
bid-ask spread in 2014, reaching 8.4
points or below the historical figure
of 11 points.
More active FX transactions helped
reduce liquidity risk which would
otherwise put pressure on the rupiah
exchange rate.
Accordingly, volatility of Rupiah
exchange rate also declined in Q4
2014, and although heightened in
2015 due to challenging global
condition, was curbed below
emerging market’s average.
10. Corporate External Debt Regulation
2014: Enhanced
Corporate Risk
Management on
External Debt
In 2014, greater foreign exchange supply
originated from the private sector in the form
of external debt, which rapid growth was
fuelled by strong domestic demand to
support national economic activity. External
funds also remained abundant and cheap
compared to domestic funding, thus
Obligation on non-bank
corporations:
Hedge a minimum of 20% of
the negative balance between
foreign currency assets and
foreign currency liabilities
In terms of compliance to the
regulation, as June 2017, around
90% of corporations with foreign
debt has complied with the
hedging obligation. Those that
have fulfilled the minimum
65
Stability Measures Background/Rationale Regulation Impact
compelling the private sector to seek external
loans.
In less than a decade, total private sector
external debt has skyrocketed three-fold
from USD54.3 billion at the end of 2005 to
USD163.2 billion in October 2014. The
position of private external debt at the end of
2014 accounted for 55.7% of total external
debt in Indonesia amounting to USD293
billion. Of this private external debt, 30%
was short term.
Growing private external debt produced
potential macroeconomic risks in the
Indonesian economy. From an external
standpoint, the possibility of tighter global
liquidity and the downward export
commodity price trend reduced corporate
repayment capacity, particularly of exporters,
which spurred currency mismatch risk and
liquidity risk. Domestically, growing
external debt was accompanied by a rising
debt service ratio (DSR), which is indicative
of potential overleverage risk
As a consequence, FX demand in the spot
market is dominated by corporates for debt
repayment. Corporates usually buy FX just
before the due date. As a result, corporates
were exposed to FX risk and rupiah also
frequently faced enormous pressure.
with a maturity period of up to
six months.
Liquidity ratio: maintain
foreign currency assets
equivalent to 50% of foreign
currency liabilities with a
maturity period of 3 months.
The Liquidity Ratio has been
increased to 75% since January
2016.
Credit Rating: Non-bank
corporation that want to
issue/sign new foreign debt
since January 2016 is required
to have credit rating minimum
of BB-.
This policy is aimed at improving
risk mitigation of nonbank
corporations especially in
managing FX risk, liquidity risks
and overleverage risk.
liquidity ratio is around 87%
(Figure C.4).
The regulation significantly
improved risk mitigation of
nonbank’s foreign debt and
reduced Indonesia external
vulnerability.
The hedging requirement
increased the forward transaction
quite significantly (Figure C3).
The increase in forward market
has improved the structure as
well as the deepening of
domestic FX market. As a result,
it contributed to lower volatility
of the rupiah exchange rate.
66
67
Chartpack – Indonesia
The policy of Minimum Holding Period of CB Bills effectively
affects capital inflows to CB Bills (SBI)
The LTV ratio results in a slowdown of the growth of mortgage loans
Figure C.1. Capital Inflows to CB Bills Figure C.2. Mortgage Loans
The hedging requirement regulation increases the daily average of
forward buy transaction particularly in the end of each quarter
Figure C.3. FX Forward Transactions Figure C.4. Compliance Rate on Hedging and Liquidity Requirements
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000 Introducing 6 month Minimum Holding Period (MHP) of CB Bills
Relaxing 6 month MHP to 1 month MHP of CB Bills
Relaxing 1 month MHP to 1 week MHP of CB Bills
68
Appendix 3
Malaysia’s Foreign Exchange Administration Rules (FEA)
Measures undertaken Rationale
FEA after the Asian Financial Crisis
Regulation of external account transactions
of non-residents
(a) Contain negative repercussions of
ringgit prices volatility
Requirement for short-term capital flows to
remain in the country for one year
(b) Stabilise short-term capital flows
arising from portfolio investments by
non-residents
FEA liberalisation (2002-2013)
Access to competitive financing for resident
companies through foreign currency
borrowing from licensed onshore banks and
non-resident companies within group
(a) Facilitate the expansion of the private
sector’s productive capacity abroad
(b) Enhance financial management
efficiency for resident companies
within group
Facilitate productive direct investment
abroad, subject to prudential requirements
(c) Support the presence of domestic
businesses globally
(d) Promote more flexible cross-border
capital mobility for productive
purposes
Promote international trade settlement using
local currencies
(e) Provide greater flexibilities for
exporters, importers and investors in
managing foreign exchange risks and
facilitate settling of trade and
investment in local currencies
69
Appendix 4
Summary of the BOT’s anti-speculative measures during 2003–2017
Date Detail of measures
Sep 2003 For underlying trade or investment, financial institutions can borrow Thai baht
or enter into transactions comparable to baht borrowing from non-residents up to
underlying value. However, for transactions without underlying trade and
investment, financial institutions can borrow Thai baht or enter in transactions
comparable to baht borrowing from non-residents for only up to THB 50 million
per entity only for a maturity not more than three months.
Oct 2003 The daily outstanding balance of the Non-resident Baht Account is limited to a
maximum of THB 300 million per non-resident. Exceptions to this limit are
considered on a case by case basis by the BOT.
Nov 2003 Financial institutions are not allowed to undertake non-deliverable forward
(NDF) transactions against Thai Baht with Non-Residents (NRs) except rollover
transactions and transactions to be terminated due to settlement failure (unwind)
caused by the counter party being unable to seek sufficient liquidity to fully
settle the transaction.
Nov 2006 - The BOT seeks cooperation from financial institutions not to issue and sell
bills of exchange in baht for all maturities to non-residents.
- Financial institutions can borrow Thai baht or enter in transactions comparable
to baht borrowing from non-residents without underlying trades and
investments in Thailand for only up to THB 50 million per group of entity only
for a maturity not more than three months.
Dec 2006 − Financial institutions are asked to refrain from selling and buying all types of
debt securities through sell-and-buy-back transactions for all maturities. Such
transactions are financial instruments which non-residents can use to evade the
BOT’s anti-speculation measures.
− Financial institutions are allowed to buy and sell foreign currencies with non-
residents or to credit THB into or debit THB from the Non-resident Baht
Accounts for the settlements relating to investments in government bonds,
treasury bills or BOT bonds only when such investment holdings are longer
than three months.
− Financial institutions are allowed to borrow baht or enter into transactions
comparable to baht borrowing from non-residents without underlying trades
and investments in Thailand only for a maturity not more than six months
(previously three months)
Feb 2008 - For transactions without underlying trade and investment in any maturity,
financial institutions can borrow Thai baht or enter in transactions comparable
to baht borrowing from non-residents for only up to THB 10 million per group
of entity (previously THB 50 million per group of entity).
- The daily outstanding balance of the Non-resident Baht Account for securities
is limited to a maximum of THB 300 million per non-resident. Exceptions to
this limit are considered on a case by case basis by the BOT.
70
The BOT’s selected measures and relaxation of controls on capital outflows and FX regulations, 2002-2017
Date Direct investment abroad Portfolio investment abroad Foreign Currency Deposit (FCD) Others
2002 Mutual funds are allowed to make
portfolio investments abroad of up to
USD 200mn per year.
2003 Upon approval by the BOT, six types
of institutional investors; namely
government pension funds, social
security funds, provident funds, mutual
funds (excluding private funds),
insurance companies and specialised
financial institutions, are allowed to
invest abroad, in: (1) debt securities
issued by the Thai government and
corporates, and (2) sovereign and
quasi-sovereign debt instruments
issued by non-residents, subject to
annual limits set by the authorities.
Imposing a 70% LTV limit on
high-value residential properties (≥
THB 10 mn)
2006 Allowing individuals and juristic
persons with foreign currency
(FC) earnings and having future
obligation within 6 months to
deposit into FCD up to the
outstanding limit of USD 0.5 mn
and USD 50 mn, respectively
71
Date Direct investment abroad Portfolio investment abroad Foreign Currency Deposit (FCD) Others
2007 -Thai parent companies are
allowed to invest in or lend to
subsidiary19 and affiliated
companies abroad up to USD
50mn per company per year.
- Thai subsidiary companies are
allowed to invest in or lend to
their parent and affiliated
companies ab As it has been
observed, a country decides on
a range of policy options based
on policy objectives, rather
than their classification given
by IFIs increased up to USD
20mn per company per year
- Companies listed in the Stock
Exchange of Thailand (SET)
are allowed to invest in or lend
to subsidiary and affiliated
companies abroad up to USD
100mn per year
- Seven types of institutional
investors including securities
companies are allowed to invest in
oversea securities, including Thai
securities20 issued abroad with no
limit, and in foreign securities
abroad up to an outstanding balance
of USD 50mn per investor with no
prior approval.
- The BOT approves an investment
quota of a USD 10bn outstanding
balance to the SEC (Securities and
Exchange Commission Thailand) to
be allocated among investors under
the SEC such as, mutual fund,
pension fund and private funds for
purchasing overseas securities
- Allowing individuals and juristic
persons with FC earnings but
without future obligation to
deposit into FCD up to the
outstanding limit of USD 0.05
mn and USD 2mn, respectively.
- Residents with foreign currencies
originated abroad can deposit up
to the outstanding limit as
follows; Individual Juristic
person
With obligations
within 12 months
USD 1mn USD 100mn
Without
obligations
USD 0.1 mn USD 5 mn
- Residents with foreign currencies
bought, exchanged, or borrowed
from authorised financial
institutions (foreign currencies
originated domestically) can
deposit up to the outstanding
limit as follows; Individual Juristic
person
With obligations
within 12 months
USD
0.5mn
USD
50mn
Without
obligations
USD
0.05mn
USD
0.2mn
- The limit of fund remittances by
Thai residents to a family
member who is a permanent
resident abroad is raised to USD
1mn.
- Relaxing the repatriation
requirement for Thai residents
with foreign currency receipts by
extending the period in which
such receipts must be brought
into the country to 360 days.
19 Subsidiary company here refers to a foreign company of which 10% of shares are held or owned by a Thai parent company. 20 Thai Securities is the securities issued by Thai resident in abroad.
72
Date Direct investment abroad Portfolio investment abroad Foreign Currency Deposit (FCD) Others
2008 Further relaxing for Thai parent
companies, Thai subsidiary
companies and companies in the
SET to invest in or lend to
subsidiary and affiliated
companies abroad such as
raising amount limit of Thai
parent companies up to USD
100 mn per year
- Increasing the investment quota of
overseas securities for the SEC from
up to a USD 10bn to USD 30 bn
outstanding balance
- Upon approval by the BOT, retail
investors are allowed to invest in
oversea securities through local
intermediaries within the amount
limit allocated by the SEC
– Removing the outstanding limit
on FCDs whose foreign
currencies are originated abroad
for both individuals and juristic
persons.
– Raising the limit on FCDs for
residents with foreign currency
originated domestically
Increasing the limit for purchase of
properties abroad from USD 1 mn
to USD 5 mn.
2009 Eight types of institutional investors
including Thai juristic persons with
assets of at least THB 5 bn are
allowed to invest in overseas
securities
High-value mortgages (≥ THB 10
mn): Increasing LTV limit for
high-value mortgage from 70% to
80% and imposing higher risk-
weighted capital charge of 75% for
loans with LTV greater than 80%,
otherwise risk-weighted capital
charge of 35%
2010 - Thai companies and individuals
are allowed to invest in or lend
to subsidiary and affiliated
companies abroad without limit
(as necessary) and up to USD
100 mn, respectively.
- Thai companies are allowed to
lend to non-affiliated business
entities abroad up to USD 50 mn.
Increasing the investment quota of
overseas securities for the SEC from
up to a USD 30bn to USD 50bn
outstanding balance.
Raising the outstanding limit on
FCDs for residents with foreign
currencies originated domestically
without obligations up to USD
0.5mn.
Increasing the limit for purchase of
properties abroad from USD 5 mn
to USD 10 mn.
2012 - Nine types of institutional investors
including company listed in the
Stock Exchange of Thailand are
allowed to invest in overseas securities
High-rise property (< THB 10 mn):
Imposing risk-weighted capital
charge of 75% for loans with LTV
greater than 90%, otherwise risk-
weighted capital charge of 35%
73
Date Direct investment abroad Portfolio investment abroad Foreign Currency Deposit (FCD) Others
- Expanding list of permitted type of
oversea securities, including foreign
currency denominated bond issued
and offered in Thailand.
2013 Removing the amount limit for
individuals investing in or
lending to subsidiary and
affiliated companies abroad
- Institutional investors are allowed to
invest in overseas securities without
limit, where such investment shall not
exceed the limit set by the supervisory
authority of the investors.
- Increasing the investment quota of
overseas securities for the SEC from
up to a USD 50 bn to USD 75 bn
outstanding balance.
Raising the outstanding limit on
FCDs for residents with foreign
currencies originated domestically
with obligations up to obligations
amount
Low-rise property (< 10 mn THB):
Imposing risk-weighted capital
charge of 75% for loans with LTV
greater than 95%, otherwise risk-
weighted capital charge of 35%.
2015 Ten types of institutional investors
including derivatives dealer are allowed
to invest in overseas securities
Raising the outstanding limit on
FCDs for residents with foreign
currencies originated domestically
without obligations up to USD 5 mn.
Increasing the limit for purchases
of properties abroad from USD 10
mn to USD 50 mn.
2016 Thai juristic persons or individuals
having investments in securities or
derivatives or deposits of at least THB
100 mn are allowed to invest in
overseas securities up to 5mn per year.
2017 Increasing the investment quota of
overseas securities for the SEC from up
to a USD 75 bn to USD 100 bn
outstanding balance.
2018 Thai Juristic persons or individuals
having investments in securities or
derivatives or deposits of at least THB
50 mn but less than THB 100 mn are
allowed to invest in overseas securities
up to USD 1 mn per year.
74
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